When liquidity is low in markets, users will face more slippage on mint/redeems of USDca as CAMP faces greater price impact from derivative market orders. Due to the time-sensitive nature of the hedging positions, CAMP would have little choice but to accept higher slippage in times of low liquidity.
What happens if there's ever a need to unwind your short positions in size but not enough liquidity to close them?
Though this scenario is very extreme and highly unlikely, it's great to dive into specifics to understand our approach better:
Position adjustments: the main time we’ll be closing our shorts or open long positions in significant volume is during a wave of mass redemptions.
Per block limit: we have implemented a limit on how much can be minted/redeemed per block, making it impossible to withdraw large amounts all at once, this helps in maintaining stability within the protocol.
Funding mechanics: a reduction in supply automatically triggers an adjustment our shorts with known risk parameters, this typically improves funding rates, reaching a point where it either deters further redemptions or attracts arbitrageurs, stabilizing the market.
Unstakingcooldown: there’s a 7-day cooldown period for sUSDca, meaning assets in the sUSDca vault can't be completely liquidated (currently ~14% of total supply) within a week of unstaking - this acts as an additional buffer against sudden market moves.
What are the liquidity risks of LST collateral onchain?
stETH-ETH Curve pool is where most stETH liquidity resides, which currently has a TVL of ~$400m. Liquidity risk is for protocols that can’t wait the time the validator exit queue takes to redeem their stETH 1:1, needing to go to the Curve pool to swap for ETH instead. If stETH liquidity is drained on Curve, stETH will depeg, leaving any protocol needing to redeem stETH in a hurry facing a discount.
Is it a risk that stETH liquidity is thin on centralized exchanges?
Yes, greater stETH liquidity would reduce chances of a stETH depeg whether on centralized or decentralized exchanges. However, the majority of liquidity is on Curve and as such the stETH-ETH Curve pool drives almost all of the price discovery for stETH, limiting the influence of stETH illiquidity on centralized exchanges.
