In order to address the possibility of liquidity pool insolvency during extreme market conditions where there is a high risk of liquidity pool of counterparty and a risk of traders unable to close profiting positions.
Qilin V2 mitigate the insolvency effects with a liquidity pool debt solution that allows debt issuance for liquidity pools to pay for profiting positions when the value of the pool goes beyond a certain Liquidity Provider Safety Factor (LPSF). This is analogous to the circuit breaker mechanism in the stock market. When the liquidity pool borrows debt to pay for profiting positions, a debt market issues Debt Token to traders through the pool as proof for future payments . The pool repays the debt to pay for traders’ profit with future liquidity pool tokens.
The debt market does not limit debt issuance
The debt market is permissionless for liquidity providers and positions holders
Debt token holders can redeem liquidity pool token when the pool is profiting.
Debt Token and the LP Token can be exchanged at a 1:1 ratio.
When adding liquidity and redeeming debt, the total amounts of LP, liquidity, and debt are equal.
Higher the LP loss, the more the pool pays for debt redemption.