Remove liquidity

How collateral can be withdrawn from existing contingent pools prior to expiration

At any point in time, prior to or after pool expiration but before the payoffs of the long and short position tokens are set, position token holders can withdraw collateral from the pool by sending back an equal amount of long and short tokens to the DIVA smart contract. Position tokens are burnt during that process.

Removing liquidity can be useful in the following two scenarios:

  • Lack of buyers: Pool creators that do not manage to sell all of their position tokens have the option to withdraw collateral without waiting until expiry (see example 1 below)

  • Liquidity: The market for the opposite asset (e.g., short) is more liquid than the market for the asset held (e.g. long) (see example 2 below)

Example 1: Alice has created a new contingent pool using 1'000 USDC as collateral and received 1'000 long and 1'000 short tokens in return. As she didn't manage to sell 400 of the short tokens, she can send back the remaining tokens in equal proportions, i.e. 400 long and 400 short tokens, to the DIVA smart contract to re-claim 400 USDC (minus a small fee) of the collateral that she deposited.

Example 2: Bob owns 10 long tokens. He would like to exit his position to realize the gains he made since his entry but realizes that there are no buy orders for the long token. Luckily, the market for the corresponding short token is much more liquid. He buys 10 short tokens to neutralize his long position and sends back both tokens to the DIVA smart contract to return the corresponding collateral amount.

Learn how to remove liquidity from an existing pool in our DIVA App Training.

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