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What are Rubicon Pools?
Everything you need to know about Rubicon's liquidity pools 🏊
Background
Rubicon is an order book protocol designed to scale and compete with the world's leading financial exchanges. To maintain decentralization and censorship resistance, the Rubicon order books are on-chain within smart contracts.
Unlike centralized crypto exchanges (Coinbase, Binance, FTX) and some "decentralized" crypto exchanges (DYDX, 0x, ZigZag), Rubicon has no off-chain servers/matching engines. We view off-chain order books and matching engines as centralized points of failure. It is not a matter of if they will go down, it is a matter of when.
Rubicon markets are online as long as the underlying blockchain is online.
Providing liquidity on order book exchanges is dominated by professional market makers. There is little to no place for individual players to compete against them. Here is what the liquidity providing looks like on a typical order book exchange:
The legacy model is a closed system with privileged actors
Only a few professional players are given exclusive access to provide liquidity in this system and reap the benefits, while individuals looking to provide liquidity are an afterthought. Not only is this found in legacy exchanges like the NASDAQ, but it is also how leading crypto exchanges like Binance and Coinbase operate. Even other decentralized exchanges using order books fall into this same trap!
Centralizing liquidity provisioning to a few small players leads to all sorts of problems and misaligned incentives (see the recent GameStop saga). Not only this, but it is completely against the spirit of DeFi, where we work to give everyone root access to the financial system. Anyone should be able to be a liquidity provider (LP)!
With this in mind, we set out to democratize the open order book, and create a sustainable liquidity system where anyone can participate. This is what Rubicon Pools is all about!
How do Rubicon Pools work?
Market making on an order book exchange is an active form of providing liquidity. LP positions are constantly adjusted to maximize returns and manage things like inventory risk and adverse selection. Active LPing is great, for those that can do it. It requires significant amounts of capital and skill, so there is no wonder it is typically left to professional firms.
With the advent of smart contracts, the concept of passive liquidity providing became popular. In an AMM for example, LPs deposit their crypto assets, where a static equation manages their position(s). This is easy to use, anyone can stake their assets with the press of a button, but in practice, many LPs lose money and underperform a simple buy-and-hold strategy.
The ideal liquidity system has the benefits of both active and passive liquidity! We want LPs to have the flexibility they need to protect their positions and optimize returns, but the system needs to be easy to use and open to anyone.
Here is how Rubicon Pools marries active and passive liquidity providers:
Rubicon Pools is an open liquidity marketplace!
Essentially, Rubicon Pools is an open marketplace for order book liquidity. Passive LPs seeking yield on their crypto assets deposit into the pools, where active LPs (we call them strategists) use the pool assets to make markets on the Rubicon order books. The Pools smart contracts split the returns from the market-making activities between the pool LPs (passive) and the strategists (active).
Our system outlines clear roles and incentives for both active and passive players to provide liquidity to the same pools, which leads to the most open & democratic order books the world has ever seen!
If you want to learn more about the technical details of Pools, visit the Rubicon Pools docs, and check out the Rubicon Protocol Overview post on our blog.
Last modified 2mo ago
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