> For the complete documentation index, see [llms.txt](https://altodex.gitbook.io/docs/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://altodex.gitbook.io/docs/core-mechanics/2.-providers-of-liquidity-and-vaults.md).
# 2. Providers of Liquidity and Vaults
The foundation of Alto's perpetual markets is Liquidity Providers (LPs). Instead of variable interest or hidden funding rates, they provide the collateral that drives trading and generate returns in the form of flat, usage-based service fees. In addition to avoiding riba, this structure complies with Shariah and guarantees traders and LPs stable, transparent economics.
Alto presents a segmented vault system that is entirely based on flat fee accrual, in contrast to other perpetual DEXs where LPs are compelled to participate in a single pool and are indirectly exposed to percentage-based interest mechanisms (such as funding payments between longs and shorts).
***
#### Design of the Vault System
* **Flat Service Fees:** When opening or closing a position and when holding open positions over time, traders pay fixed service fees. These are fixed, transparent amounts (e.g., "0.5 USDC per 1,000 USDC open position per 24h") rather than fluctuating percentages of borrowed margin.
* **Vault Selection:** LPs have the option to divide liquidity among three distinct vault strategies: volatility-focused, directional, and delta-neutral.
* **Tokenized Shares:** ERC-20 tokens are used to represent vault deposits, which makes them interchangeable across DeFi.
* **Auto-Hedging:** By using counter-hedges, the system shields LPs from imbalances.
Instead of interest or earnings based on spreads that fluctuate in response to market funding rates, LPs thus receive consistent fee income.
***
#### Vaults that are Delta-Neutral
* **Goal**: No directional exposure and a steady yield.
* **Revenue**: LPs receive flat service fees (open/close fees plus a flat daily position fee) from all trades.
* **Mechanism**: To maintain market neutrality, Vault dynamically hedges open interest imbalances.
* Low level of risk. shielded from directional fluctuations, but results could still be impacted by severe volatility or oracle risk.
***
#### Directional Vaults
* **Goal**: Earn money by expressing a market opinion.
* **Revenue**: Accrues exposure gains or losses from the directional stance in addition to the flat fees produced by trader activity.
* **Mechanism**: Long or short vaults are chosen by LPs. When a "Long ETH Vault" is selected, it receives flat service fees from trader usage and gains when ETH appreciates.
* Depending on market movements, the risk level can range from medium to high.
***
#### Volatility Vaults
* **Goal**: Profit from premium yields in erratic markets.
* **Revenue**: Because there is a greater demand for leverage during times of high volatility, higher flat fees are assessed. These higher fees are distributed proportionately to LPs.
* **Mechanism**: Liquidity designated for volatile conditions is provided by LPs. Returns are lower during times of market stability and higher during times of market volatility.
* High level of risk. Higher rewards are earned by LPs, but when hedging is not perfect, they may suffer short-term losses.
***
#### Flat Fee Structure in Practice
Alto substitutes flat fees for interest-style funding rates, like:
* **Trade Execution Fee:** A fixed service charge made at the opening or closing of a trade (e.g., 1 USDC per trade regardless of leverage).
* **Daily Position Fee:** A fixed service charge per open position that is scaled by notional size (e.g., 0.50 USDC per 1,000 USDC position, per 24h).
* The Alto treasury receives a small, flat protocol-level cut for operations and expansion, known as the Vault Performance Fee (Optional).
All fees are:
* **Transparent**: Shown prior to trade confirmation.
* **Not Compounding:** Not "interest," not based on a percentage.
* **Auditable**: Completely on-chain logged in.
***
#### LP Protection & Auto-Hedging
Alto's vaults make use of the following to make sure LPs aren't unjustly exposed during one-sided markets:
* Continuous tracking of long versus short open interest is known as OI monitoring.
* **Counter-Hedges:** Automated hedging against skew, carried out via internal balancing pools or external venues.
* **Circuit breakers:** The system may temporarily modify new position entry fees until balance is restored if imbalances surpass safe thresholds.
This implies that directional bias won't destroy LPs' ability to maintain a consistent, flat fee income.
***
#### Risk and Reward Transparency in LP
Alto offers a Vault Risk Dashboard to assist LPs in selecting the best vault:
* APR expectation (based on past trading activity and flat fees collected).
* Level of risk (volatility, directional, and neutral).
* Breakdown of fee distribution.
* Simulation of historical vault performance.
This guarantees that LPs are always aware of what they are opting into and are able to make wise decisions.
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