A Guide to Providing Liquidity

4 min read

A guide to providing liquidity to cover pools in the Neptune Mutual marketplace app.

If you have stablecoins that you'd like to earn a yield on, you might consider joining the Neptune Mutual ecosystem and providing liquidity to a cover pool in the Neptune Mutual cover marketplace.

Liquidity providers (LPs) earn fees from users who purchase cover policies from the cover pools that they have provided liquidity to. In addition to these returns, Neptune Mutual is developing a whole number of other benefits that can be accrued by LPs.

Which Pool Should I Provide Liquidity To?#

In the Neptune Mutual marketplace, CeFi and DeFi projects, asset managers and investors can create parametric cover pools to protect their respective communities from security and custody risk. Cover pools are either called “dedicated”, if the liquidity and cover products are dedicated to a specific project, or diversified, if the liquidity is fed into a diversified portfolio of cover products.

Cover products in a diversified cover pool each have their own cover parameters and cover policy pricing and are purchased independently of each other. For a more detailed description of the difference between dedicated cover pools and diversified cover pools as well as a guide to navigating the risk and returns as a diversified cover pool liquidity provider, you might want to have a read through our blog “Enhanced Liquidity via Diversified Cover Pools”.

Diversified pools generally offer LPs higher returns than dedicated cover pools because of the leverage of underwriting capital that can be employed as a result of the diversity of the risks covered.

How to Provide Liquidity to a Cover Pool#

  1. Firstly, make sure you have NPM tokens and USDC in your wallet. The minimum required contributions vary depending on the pool in question.
  2. If you're interested in providing liquidity, open the Neptune Mutual App for the network you're interested in (Ethereum Mainnet or Arbitrum). Scroll down to the cover product cards and click on a cover product of interest.
  3. Click on “Provide Liquidity”, and this will show you a list of the products that are covered by the pool, as well as the terms and conditions. Read these carefully, and if you are happy with them, sign the Risk Disclosure & Disclaimer. Note that there are separate cover terms for each cover pool, and in addition, there is a set of standard terms and conditions for the marketplace.
  4. You'll then be shown the liquidity that is currently in the pool and the reassurance amount, both expressed in dollars.
  5. Enter the amount of USDC you'd like to provide to the pool. You'll be shown the tokens that you will receive that serve as a proof of deposit.
  6. Check the unlock cycle dates. Keep in mind that the USDC that you have provided will be locked until the unlock window shown below.
  7. Click to approve the transaction. You will be asked to verify the transaction in Metamask (or other compatible wallets).

Once the transaction is complete, you can go to “My Liquidity” to view a record of the liquidity you have supplied in the marketplace. If you wish to unlock your liquidity and withdraw it, you can do so when the unlock cycle is open.

Liquidity providers have the opportunity to unlock access to NFTs within the Neptune Mutual ecosystem.

FAQs about Providing Liquidity#

What Tokens Do I Need to Provide Liquidity?#

Liquidity providers must stake NPM tokens in order to provide USDC liquidity (this requirement will come into force after the end of the transition period following the launch of the NPM token).

How Long Must I Lock Funds up for When Providing Liquidity?#

The lockup period is typically 6 months; however, this can vary depending on the terms of the cover pool. You can see the unlock cycle dates at the bottom of the liquidity provider form. Check those dates before providing USDC liquidity to confirm that you're happy with the lockup period.

What Do Liquidity Providers Earn?#

Liquidity providers earn a portion of the fees from users who purchase cover policies from the cover pool that you have provided liquidity to. The fees are allocated to LPs based on their percentage contribution to the cover pool.

What Risks Do Liquidity Providers Face?#

A liquidity provider contributes funds that are used to underwrite risks. This means that the funds are used to pay out cover policy holders in the event of a qualifying incident, and therefore LPs risk losing the capital they have provided. LPs are strongly encouraged to read the cover terms and do their own due diligence carefully before providing liquidity.

If you'd like to know more about providing liquidity for Neptune Mutual cover pools, or are interested in participating in any other parts of our marketplace, please contact us. Our team would be happy to assist you. You can join our Discord and we will answer ASAP, or start a discussion on our community forum and get assistance from everyone in the Neptunite Ecosystem.