JLP Depeg: Premium/Discount Explanation
In this article, we’ll break down $JLP — what it is, which of our strategies use it, and the concept of $JLP depeg (premium/discount), which many find confusing.
Enjoy the read!
What is $JLP?
The JLP token represents the liquidity provider shares of Jupiter Perps within the pool. Its value is derived from:
- An index of SOL, ETH, WBTC, USDC, and USDT
- Traders’ profit and loss (PnL)
- 75% of all trading fees, including: Opening & closing fees, Price impact fees, Borrowing fees and Trading fees.
Earning Yield
APY of $JLP (in USD) is based on 75% of trading fees collected from perpetual trading.
- This excludes asset appreciation and traders PnL.
- Fees are automatically reinvested into the pool every hour, compounding rewards for JLP holders.
JLP Utilizing Vaults & Strategies
Hedging out all of the underlying volatile assets (SOL/ETH/BTC) and traders PnL creates the strategy utilized by the “USDC Staking (JLP Delta Neutral)” & “JLP Neutralized” vaults. These strategies leave no exposure to JLP virtual price movements and receive JLP yield.
Hedging the volatile coins partially (ex. BTC/ETH/SOL) leaves exposure to the remaining asset (ie. SOL). These vaults include the SOL/ETH/BTC Super Staking vaults. Each vault has exposure to price movements of its focused asset, while also receiving yield from $JLP.
Both “Trader’s REKT” & “Traders Win” hedge out all of JLP’s underlying assets, while in addition either taking inverse aggregated positions of Jup traders, or copy trading the aggregated positions of Jup traders. Providing JLP yield and additional profit or loss from Jup perp trader decisions.
What is the virtual price vs. the market price of JLP?
The JLP virtual price is derived from the TVL of its underlying assets (SOL/ETH/BTC/USDT/USDC).
When trading in/out (depositing/removing liquidity) of JLP using Jupiter Swap, Jupiter automatically mints/burns JLP at its virtual price or swaps via market pools if theres a better pricing. Minting JLP when depositing liquidity (buying) or burning JLP when exiting (selling).
On secondary markets, where JLP is freely traded, its price is allowed to be decided by market demand. This price is referred to as the market price. Involving no minting or burning, only being priced at what the market values it. This is where “premiums/discounts” are derived.
Related ROI Increases and Drawdowns
Though these vaults hedge JLP by means of its underlying assets and traders PnL, this creates a delta neutral position in regards to JLP’s virtual price. These strategies are, however, exposed to price fluctuations in regards to its market price. As such returns on these vaults increase to follow JLP’s “Depeg”.
While this can appear beneficial (as returns jump up), what usually follows is JLP eventually returning to at, or near its virtual price. Although during this time fees are being continuously collected, returns will show as decreased, following JLP back down to its virtual price.
While relatively tiny “premiums/discount” appear often and small “premiums/discounts” appear somewhat, the longer one is deposited in these vaults collecting yield from JLP fees, the more these bumps “smooth out”. If only deposited for a short amount of time, these bumps can seem more significant.
Check out our another article too—Neutral Trade Vaults — Short-term VS Long-term investment:
https://neutraltrade.medium.com/neutral-trade-vaults-short-term-vs-long-term-investment-8eb3c2c5e8c1
Premium/Discount/Arbitrage
At times there occur discrepancies between JLP’s virtual price and the JLP market price. The market price of JLP being higher than its virtual price is referred to as a “premium”, while the JLP market price being beneath the virtual price is referred to as a “discount”.
When this occurs, opportunity for arbitrage is created between Jupiter and secondary markets. Users profiting through trading on secondary markets, and minting/burning through Jupiter. While this can be effective at keeping the price close to the virtual price, it is not perfect. And so, there can often be a, usually small, “premium/discount” on JLP.
Assets Under Management Limit
In addition, a JLP minting cap exists.
When the maximum value of Assets Under Management (AUM) is reached, Jupiter will no longer allow to mint JLP. The AUM cap being reached can further inhibit the premium reducing. As new liquidity can not be added through Jupiter (JLP no longer being minted), demand turns to secondary markets. With enough demand a JLP “premium” can form.
Due to this, recently there have been times where JLP has sat at a relatively high premium over the medium term due to high market demand in addition to the AUM cap being reached. Over this time a “premium” of ~1.8% was reached.
Conclusion
JLP’s price is mainly tied to the value of its underlying assets, keeping it close to its virtual price. In secondary markets, supply and demand can create temporary differences, leading to premiums or discounts, which can impact the balance of a respective vault on Neutral Trade.
While market price fluctuations may cause JLP to “depeg” at times, built-in mechanisms like minting, burning, and arbitrage help bring it back in line.
Even when JLP sits at a premium for extended periods — especially if the AUM cap is reached — historically, it tends to return to its virtual price over time. Meanwhile, yield from collected fees continues to accumulate, helping to smooth out short-term bumps.
Thanks for reading 👏
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