> For the complete documentation index, see [llms.txt](https://hypotheca.gitbook.io/hypotheca-docs/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://hypotheca.gitbook.io/hypotheca-docs/hypotheca/economics/liquidity-provider-returns.md).

# Liquidity Provider Returns

How liquidity providers earn returns from interest payments and liquidation activity within Hypotheca.

Liquidity is the inventory that makes credit access possible.

Liquidity providers supply capital to Hypotheca pools. That capital allows verified agents to access measured credit under the protocol's verification and risk controls.

The whitepaper defines two primary sources of liquidity-provider returns: **interest payments** and **liquidation bonuses**.

### How LP returns work

The normal credit cycle is direct:

```
LP Supplies Liquidity
        →
Verified Agent Borrows
        →
Agent Pays Interest
        →
Interest Contributes to LP Returns
```

When a position reaches liquidation conditions, a second return source applies:

```
Position Becomes Liquidatable
        →
Liquidation Occurs
        →
Liquidation Bonus Applies
        →
Liquidation Proceeds Contribute to LP Economics
```

LP capital comes from liquidity supplied to the pools. The resulting credit activity creates the defined economic sources of return.

### Interest payments

Borrowers pay interest on borrowed liquidity. Interest is therefore a direct economic consequence of credit access.

Borrowing terms are influenced by Hypotheca's risk model and credit tiers. These are adjustments to the base rate, not fixed final interest rates:

| Credit tier | Interest-rate adjustment |
| ----------- | ------------------------ |
| Platinum    | Base rate -20%           |
| Gold        | Base rate -10%           |
| Silver      | Base rate                |
| Bronze      | Base rate +15%           |
| Rejected    | No borrowing access      |

The whitepaper does not define one fixed base interest rate. It also does not define a guaranteed APY or return level for liquidity providers.

### Liquidation bonuses

Liquidation is the second defined source of LP returns. The liquidation bonus is **8%**.

Liquidation occurs when a borrowing position violates applicable risk conditions. The bonus forms part of the resulting liquidation economics. The dedicated liquidation reference explains the mechanism in detail.

### LP returns are not built around speculative token rewards

{% hint style="info" %}
The defined LP return sources are borrowing interest and liquidation bonuses.
{% endhint %}

The whitepaper does not include these as LP return sources:

* Uniswap swap trading fees
* Token airdrops
* Governance token rewards
* External protocol fee sharing

This distinguishes Hypotheca's stated pool economics from unrelated incentive models.

### LP economics and risk

Returns operate inside a constrained risk framework. Liquidity providers remain exposed to the economic performance of the borrowing system.

The key controls include:

* Minimum collateralization: **125%**
* Liquidation threshold: **110%**
* Liquidation bonus: **8%**
* Maximum borrow per agent: **5% of the pool**
* Oracle pause at **5% deviation**
* Global borrow halt at **15% price movement within one hour**

These controls constrain borrowing and help protect pool liquidity. They do not eliminate economic risk.

{% hint style="warning" %}
No single agent can borrow more than 5% of a pool.
{% endhint %}

This limit reduces concentration exposure and prevents one borrower from dominating a pool's credit utilization. It does not eliminate concentration risk.

### Conceptual return example

A verified agent borrows liquidity from a Hypotheca pool. During the borrowing period, the borrower accrues interest. That interest becomes part of the defined LP return mechanism.

If the position later enters liquidation, the liquidation mechanism applies. The defined 8% liquidation bonus becomes part of the liquidation economics.

The whitepaper does not provide enough information to calculate APY, profit, or exact LP earnings.

### What is included

**Included in defined LP returns**

* Borrowing interest
* Liquidation bonuses

**Not defined as LP returns**

* Uniswap trading fees
* Token airdrops
* Governance rewards
* External protocol fee sharing


---

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