Liquidity Pools & Capital Efficiency 💧
5.1 Pool Accounting
The Liquidity Pool in HFDX is the protocol's central capital engine, responsible for both backing leveraged positions and absorbing PnL fluctuations. Unlike isolated margin accounts, HFDX pools liquidity across all markets, improving capital efficiency while ensuring solvency.
Key internal mechanisms:
Normalized Asset Accounting — All assets in the pool are tracked in a unified internal denomination, enabling consistent calculation of utilization, margin, and risk exposure.
Continuous Utilization Monitoring — Utilization ratios are computed in real-time:
High utilization increases risk, triggering conservative margin adjustments and dynamic funding rates.
Risk-Weighted Exposure — Each asset is assigned a risk weight based on volatility and liquidity. This ensures that the pool can absorb losses even under extreme market stress.
Dynamic Liquidity Allocation — Capital is dynamically allocated to active positions while maintaining reserves for liquidations, funding payments, and LLN obligations.
By centralizing liquidity, HFDX maximizes capital efficiency, reduces idle funds, and improves yield distribution predictability.
5.2 LP vs LLN Comparison
HFDX supports two primary forms of capital deployment: Liquidity Providers (LPs) and Liquidity Loan Notes (LLNs).
Yield
Variable, dependent on trading activity and pool utilization
Fixed, contractually enforced over term
Lockup
Flexible, can deposit/withdraw
Fixed until maturity
Risk Exposure
Direct exposure to pool PnL + utilization risk
Protocol-level only (deterministic)
Suitability
Active DeFi participants
Institutional treasuries and conservative capital allocators
LPs benefit from variable yield, capturing upside from trading activity and funding payments.
LLNs provide predictable returns by transforming variable revenue into a fixed APR, suitable for treasury or institutional accounting purposes.
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