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Time Management: Locking
Avantis offers LPs the flexibility to manage their time in the protocol, for enhanced share of protocol revenues
Liquidity locking was implemented in order to give liquidity providers a way to further align themselves with the protocol. By locking junior and senior LP tokens, you earn extra rewards depending on the amount and time locked.
Here's how it works: By default, all liquidity providers in the USDC vault (across any risk tranche) get an auto-compounding vault token. However, LPs can choose to lock their capital into the protocol, and get higher fees in exchange for providing more stability to the protocol TVL. Locking effectively gives you additional “point boosts” compared to unlocked LPs (each dollar of unlocked capital represents 1 point, and and earnings are distributed based on each LPs points). The minimum lock period is 14 days, and the maximum lock period is 6 months. Depending on the lock duration, LPs get a minimum point boost of 1.2x (compared to unlocked LPs), all the way up to a maximum of 4x. This means that an LP locking their stake for 6 months will get much higher additional fee APR than someone locking for 14 days, and obviously higher than someone not locking their capital at all. Your APR boost will depend on your lock duration and invested capital.
Example: LP 1 invests $100 into the protocol. LP 2 invests $100 and then locks it for 6 months. This means that LP 1 has 100 points, while LP 2 has 500 points (100 base points + 4x boost). If earnings for LPs were $100, then:
- 1.LP 1 gets 100/600 * $100 = $14
- 2.LP 2 gets 500/600* $100 = $84
This is the power of time locks !
Technical details: The locking process will send the vault ERC-4626 LP token into a smart contract and mint an ERC721 that will track and represent the locked amount to the locker's wallet. The ERC721 is composable. The NFT accumulates trading fees in real time, which can be claimed without unlocking the NFT. LPs can also choose to unlock their capital early for a fee.
A few things to note about this feature:
A. The enhanced rewards only apply to the locked portion of an LPs capital.
Example: An LP who locks 100 USDC for 6 months only gets a 5x reward multiplier on the 100 USDC invested. If the same LP also invests 1,000 USDC into a vault but doesn't lock it, the LP does not receive additional rewards on the extra 1,000 USDC. Both LPs will receive the regular vault rewards that are unlocked.
B. The reward multiplier ends once the lock period expires. A user looking to get the reward multiplier must re-lock their stake.
Example: An LP who locks 100 USDC for 6 months gets a 4x reward multiplier on the 100 USDC invested. After 179 days, the LP still receives the same reward multiplier. However, on the 180th day, the extra rewards stop, and the LP will need to be relocked to continue the same rewards.
The liquidity locking is actually considered a soft lock. This means LPs can technically unlock the tranches early, but will incur a fee for doing so. This approach provides LPs more flexibility while keeping rewards fair for other protocol LPs, especially to LPs that did not lock. The fee is calculated with two components.
The Fee Percentage is set to 10%. This is meant to be high to keep things fair and sustainable for the protocol.
Example: An LP locks their capital for 6 months. At the 3 month mark, they choose to unlock their capital. They can do so at a 5% fee. Hence, the unlock fee decreases from 10% to 0% linearly over the course of an LPs lock duration. Choose wisely before locking your capital !