Partitioned LP

In Chromatic Protocol, as explained earlier, the concept of mark price, which is calculated based on trading volume and liquidity using arbitrary formulas, is discarded. Instead, by clearly defining the underlying indices provided by the oracle as the basis for settlement, the Chromatic Protocol aims to focus on the role of speculation and hedging in futures trading.

Trading fees and price impact are considered to serve the same function of price discovery and are designed based on the concept of spread in the order book. Chromatic's Liquidity Pool consists of long and short pools, each divided into four depth sectors. There are a total of eight depth sectors, each containing nine liquidity bins. These 72 liquidity bins, with 36 in the long pool and 36 in the short pool, have different fee rates.

Makers can provide liquidity to any of the 72 liquidity bins. This can be seen as a similar form to the concentrated liquidity provision in UniSwap V3. In comparison to the single fee system in existing decentralized futures exchanges, Chromatic Protocol follows a different approach as depicted in the figure below.

In the figure of existing LP, takers have limited options with only +/-0.1% (10bps) and makers find it challenging to implement various hedging or delta balancing strategies.

Chromatic Protocol’s partitioned LP consists of a total of 36 liquidity bins, ranging from the typical fee range of +/-0.01% (1bps) to +/-0.3% (30bps), to accommodate extreme price movements with a range of +/-0.3% (30bps) to +/-50% (500bps).

As a result, makers have the flexibility to employ suitable risk management and hedging strategies based on market conditions. Competitive makers can lower their hedging costs and risk management expenses, enabling them to provide liquidity at lower fees. With a larger market share, these makers can ultimately offer takers lower fee rates, benefiting them with reduced trading fees.

The rates in the unique name of each individual bin (e.g., USDC - ETH/USD +0.3%) represent the trading fee as well as the relative price distance from the index price. For example, if the underlying index is 1,000 USD, when a taker buys liquidity from the USDC - ETH/USD +0.3% liquidity bin, it means they are paying a 0.3% fee and purchasing the asset at a price of $1,003 USD. If a maker provides liquidity to the 0.3% long liquidity bin, it has a similar effect to tracking the current price on an order book based exchange and placing a sell order at a price that is 0.3% higher.