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docs/appendix/position-based-lp.md

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+---
+sidebar_position: 3
+---
+
+# Position-Based Liquidity Pools
+
+## Overview
+
+In traditional DeFi systems, liquidity providers (LPs) are issued **floating LP tokens** that represent their proportional share of a pool's current value. These are known as **value-weighted pools**, where your position fluctuates with market volatility and total pool value.
+
+However, our model uses a **time-weighted, position-based pool** — a fundamentally different approach that prioritizes fairness and long-term contribution over market speculation.
+
+## Key Principles
+
+### 1. Position-Based Accounting
+
+Every liquidity contribution is recorded as a **fixed position**:
+
+- Token type (e.g., USDC, Peaq, TFT)
+- Contribution amount (e.g., 1,000 USDC)
+- Timestamp (e.g., January 1, 2025)
+
+These positions are tracked permanently and **do not change with price fluctuations**.
+
+### 2. No Floating LP Tokens
+
+- Unlike standard DeFi protocols, we **do not issue LP tokens** that float with pool value
+- Users do not gain or lose share based on volatility
+- Instead, share is determined by:
+  - **How much** you contributed
+  - **How early** you contributed
+
+## Why This Matters
+
+| Feature                         | Value-Weighted Pools | Time-Weighted, Position-Based Pools |
+| ------------------------------- | -------------------- | ----------------------------------- |
+| Contribution tracking           | Dynamic              | Fixed (amount + time)               |
+| Exposure to volatility          | Yes                  | No                                  |
+| Fairness over time              | No                   | Yes                                 |
+| Transferable LP tokens          | Yes                  | No                                  |
+| Encourages long-term commitment | No                   | Yes                                 |
+| Impermanent loss                | Yes                  | No                                  |
+
+## Implications
+
+### Pros
+
+- **Fair distribution** based on participation, not market timing
+- **No front-running or last-minute pool stacking**
+- **No impermanent loss** (unlike traditional DeFi pools)
+- Encourages **early and stable contributions**
+- Aligns incentives with long-term growth, not speculation
+
+### Trade-Offs
+
+- **No instant liquidity switching** between pools
+- Internal migrations between pools require **position translation**, not token swaps
+- Less suitable for active traders; optimized for committed supporters
+
+## Internal Switching Considerations
+
+Because we track original token amounts and timestamps:
+
+- Users cannot simply "convert" one pool share into another
+- Any movement between pools requires:
+  - Removing the original position from Pool A
+  - Translating it into an equivalent position in Pool B, preserving contribution integrity
+
+This model behaves more like **vesting or NFT-based positions** than traditional LP tokens.
+
+---
+
+## Value Calculation and Profit Distribution
+
+### How Value is Calculated
+
+Value in this system is calculated using a fundamentally different approach:
+
+- Each liquidity contribution maintains its **original value** rather than floating with market prices
+- Your share of the pool is determined by **contribution amount** and **contribution time**
+
+### Profit Distribution When Someone Exits
+
+When liquidity providers exit the pool through the Dutch auction mechanism:
+
+#### Dutch Auction Process
+
+1. LPs submit exit bids with an amount and minimum acceptable price
+2. Bids are sorted from lowest price to highest
+3. The system fills bids from the bottom up until reaching the maximum allowed exit amount
+4. The last accepted bid sets the clearing price for all successful exits
+
+#### Margin Collection
+
+- A discount is defined per pair of tokens (e.g., USDC to TFT)
+- When LPs exit, they receive the agreed amount minus this discount
+- The collected margin (the discount amount) is pooled together
+
+#### Profit Distribution
+
+- Collected margins are redistributed to all **remaining liquidity providers**
+- Distribution is proportional to each LP's share of the total liquidity
+- **The longer you hold, the more you benefit** when others leave
+
+#### Exit Protections
+
+- Only up to 50% of total liquidity ever contributed (minus past exits) can leave through Dutch auctions
+- This cap protects the pool from being drained
+
+---
+
+## Summary
+
+Our system is built on **time-weighted, position-based liquidity** — not market-weighted value shares. This ensures that:
+
+- All participants are rewarded based on **what** they contributed and **when**
+- Not how the market fluctuates afterward
+
+It's a principled approach for long-term alignment, fair participation, and stable tokenomics.
+
+:::info Virtuous Cycle
+This creates a virtuous cycle where early and committed participants are rewarded, while the pool remains protected from being drained by opportunistic withdrawals.
+:::
+
+:::tip Learn More
+See how exits work in practice with the [Dutch Auction Exit Mechanism](./dutch-auction-exit.md).
+:::