Providing Liquidity
Overview
HertzFlow's liquidity infrastructure operates through isolated market pools that serve as counterparties to leveraged perpetual traders. Liquidity providers deposit USDT to earn yield from trading fees, borrow fees, and trader losses while maintaining exposure to specific market dynamics. The protocol implements a single-token deposit model with automatic 1:1 long-short rebalancing, eliminating complexity while ensuring capital efficiency.
Unlike traditional AMMs that rely on continuous buyer-seller matching, HertzFlow employs pooled virtual liquidity capable of absorbing open interest imbalances and directional exposure. This architecture ensures trade settlement remains robust even during extreme market movements, while sophisticated risk controls protect liquidity providers from excessive drawdowns.
HzLP: Market-Specific Pools
HzLP is the liquidity provider token minted when assets are deposited into an individual HertzFlow Liquidity Pool. HzLP tokens represent proportional ownership of isolated liquidity pools, each dedicated to a single perpetual market. When depositing USDT, providers receive HzLP tokens reflecting their pool share. These tokens accrue value as the pool collects trading fees and realizes profits from trader losses.
Each market operates independently with isolated risk parameters, allowing liquidity providers to select exposure based on their risk preferences. A BTC/USD pool's performance remains unaffected by ETH/USD pool dynamics, providing granular control over capital allocation and risk management.
Key characteristics:
Direct exposure to a single pool / market
Value reflects pool performance and fee accrual
Redeemable for the underlying pool assets
HzV: Vault Aggregation
HzV is the vault share token issued for deposits into HertzFlow Vaults. Each vault aggregates liquidity across multiple markets that share the same strategy, optimizing capital efficiency by shifting liquidity between markets based on utilization rates and fee opportunities.
Key characteristics:
Indirect exposure across multiple markets
Capital allocated dynamically based on pool utilization and risk
Returns reflect aggregate vault performance rather than individual pool fees
More aggregations upcoming
Pool Liquidity Options
Deposits
Depositing USDT into a market pool mints HzLP tokens representing your proportional share, and into a vault mints HzV tokens representing your share. The protocol automatically splits deposits equally between long and short collateral reserves, maintaining a 1:1 balance regardless of current open interest skew.
Token Pricing:
Assets Under Management (AUM) includes deposited USDT, accrued fees, and net unrealized PnL from open trader positions. As traders pay fees and realize losses, pool AUM increases, raising the value of each liquidity token. Conversely, trader profits decrease pool value.
Deposit Capacity Limits:
Maximum deposit amounts are constrained by risk parameters designed to prevent over-concentration:
Where Max AUM represents the protocol-configured ceiling for each market's total liquidity. This hard cap maintains balance across markets by preventing unlimited growth in popular pools that would drain liquidity from others. Each market's cap is calibrated based on trading volume, volatility, and oracle reliability.
Withdrawals
Withdrawing liquidity burns HzLP or HzV tokens and returns USDT at the current price. Withdrawals settle instantly on-chain without waiting periods, though maximum withdrawal amounts are subject to real-time risk checks ensuring sufficient liquidity remains for open positions.
Withdrawal Capacity Constraints:
Two separate limits govern withdrawal availability.
PnL Factor Constraint:
This constraint protects remaining LPs when trader unrealized profits are high. If traders hold large winning positions, withdrawals are restricted to prevent the remaining pool from becoming undersized relative to obligations. The Max PnL Factor for Withdrawals parameter determines how much pool value can be at risk from unrealized trader profits.
Reserve Factor Constraint:
Reserved USD represents total open interest (notional value of all open positions) on each side. The Reserve Factor ensures sufficient liquidity remains to cover potential position closures. This prevents LPs from withdrawing capital currently backing active trades.
The effective withdrawal limit is the minimum of these two constraints:
Automatic Rebalancing
The protocol maintains equal long and short collateral pools through automatic rebalancing during deposits and withdrawals. When you deposit USDT, the contract allocates 50% to long collateral reserves and 50% to short reserves, regardless of current open interest distribution. This ensures the pool can service both long and short traders without bias.
Price impact fees are eliminated at the contract level for liquidity operations. Unlike trading actions, deposits and withdrawals do not charge dynamic price impact, simplifying the LP experience and removing penalty mechanisms that would discourage healthy liquidity flow.
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