Structuring Liquidity
Last updated
Last updated
The Liquidity Book offers endless ways to structure and manage your liquidity. Unlike DEX V1, where supplying liquidity was available as a passive yield farming technique, you can now deploy active liquidity provisions managing various strategies to suit your investment goals.
In a balanced distribution, capital is concentrated around the active trading range and tapered towards the end of the price range in a bell curve or Gaussian distribution.
Having liquidity concentrated around the active bins allows users to capture higher trading fees. The more distributed model allows the strategy to capture a larger price range with less chance of being priced out of the active bin.
Concentrating your liquidity tightly around a small price range can be seen as a more aggressive investment approach.
Tightly concentrating your liquidity on the active price captures a high share of swap fees, achieving a higher APR, and ensuring all capital is used efficiently.
However, as the token price changes, your position may become priced out of the active bin and will no longer receive trading fees.
Also, since only the active bin has both assets, a shift in price will result in the LP’s position being 100% comprised of the underperforming asset.
A uniform distribution can be seen as the most risk-averse approach, which emulates a similar model of distribution to the x*y=k DEX V1 design.
Using this option, LPs can distribute their liquidity evenly across a larger price range.
Since your position is diversely spread you will be able to capture trading fees without worrying about being priced out of the active bin. However, a larger price range results in inefficient liquidity allocation, meaning a much lower APR on trading fees.
A parabolic distribution allows capturing of trading fees at the extreme ends of the price range. These ranges generally have lower levels of liquidity allowing for LPs to potentially capture a higher share of trading fees in less active bins.
During highly volatile times, this strategy could allow the liquidity provider to capture higher APR trades, however, during stable markets the liquidity remains unused.
It also behaves in a similar way to ranged orders. It could be used by the LP to average down their allocation or take profit when prices increase.
Liquidity Book's discretized bins allow for range orders which can act in a similar way to traditional buy/sell conditional orders. It can also allow users to automate dollar-cost-averaging on their selling or accumulating of tokens.
Since only the active bin contains both tokens, the LP could concentrate their liquidity at a lower price to effectively buy the underperforming token at a lower price target.
Example: AVAX-USDC Pool, the LP could deposit USDC concentrated around the $10 price, when the pool trades below this price the USDC is converted into AVAX. The LP can then withdraw liquidity, which contains solely AVAX tokens.
The LP could concentrate their liquidity at a higher price to effectively sell the overperforming token to take profit.
Example: AVAX-USDC Pool, the LP could deposit AVAX concentrated around the $100 price, when the pool trades above this price, all AVAX is converted into USDC. The LP can then withdraw liquidity, which now contains solely USDC.
Similar to range orders, the LP could deposit a single asset into multiple bins around their price target. This allows the user to buy or sell tokens leading up to their target.
In this scenario, the LP earns swap rewards during the strategy and does not incur fees themselves.
