Concentrated Liquidity
As DerpDEX uses concentrated Liquidity Automated Market Maker (CLAMM) and focuses on maximising capital efficiency. With Concentrated liquidity, LPs can choose a custom price range when providing liquidity. This allows for concentrating capital within ranges where most of the trading activity occurs. To achieve this, DerpDEX creates individualised price curves for each of the liquidity providers. What is important is that users trade against combined liquidity that is available at a certain price point. This combined liquidity comes from all the price curves that overlap at this specific price point.
This allows DerpDEX to manage large liquidity at a certain price range where the token pairs are mostly traded. Liquidity Providers don't need to think of full range of prices from 0 to â and provide large capital. And, LP's earn a similar interest when they put liquidity in a price range where it is mostly traded.
Non-Fungible Liquidity
Non-Fungible Liquidity enables liquidity providers to have granular control over their positions. They can choose specific price ranges and customize their exposure. LP positions will be represented by non-fungible tokens (NFTs).
Price Range
Price range options you mentioned (Conservative, Active, Full range, Custom) are typically associated with the strategy or behaviour of liquidity providers.
Conservative:
The conservative price range option aims to distribute liquidity across a wider range of prices, beyond the active approach. It provides liquidity at prices slightly away from the center to capture potential price movements. It allows for more active participation in the market and potential gains from price fluctuations.
Active:
The active price range option aims to allocate a significant portion of liquidity to the centre of the price range. It prioritises maintaining a stable liquidity depth around the current market price. It provides a narrower range of prices for trading, ensuring that liquidity is concentrated around the current market price.
Full Range:
The full range price option spreads liquidity evenly across the entire price range available in the liquidity pool. It provides liquidity at both the extremes and the centre of the price range. It maximizes the provision of liquidity and allows users to trade tokens at any price within the pool's range.
Custom:
The custom price range option allows liquidity providers to define their desired price ranges and weight distributions based on their specific preferences or market insights. It offers flexibility to allocate liquidity based on personalised strategies or to adapt to specific market conditions.
Use Cases
Below are the use cases for the respective Price Range Options provided by DerpDEX:
Dollar Cost Averaging (DCA) Strategy
When employing DCA as a liquidity provision strategy, LPs can utilize the price range options to gradually allocate liquidity over time, regardless of short-term price fluctuations.
Approach: LPs may choose the "Active" price range option to concentrate liquidity around the current market price, aligning with the concept of consistently investing a fixed amount over regular intervals. This ensures stability and minimizes exposure to price volatility.
Momentum Trading Strategy
LPs can utilize the price range options to align with a momentum trading strategy, which aims to capitalize on assets experiencing upward or downward price momentum.
Approach: LPs may choose the "Conservative" price range option to distribute liquidity across a wider range of prices, capturing potential price movements. This approach allows LPs to participate in trading opportunities beyond the conservative center range.
Mean Reversion Strategy
LPs can incorporate a mean reversion strategy when providing liquidity, which involves trading assets based on the assumption that prices will revert to their average.
Approach: LPs may opt for the "Full Range" price option, spreading liquidity evenly across the entire price range available in the liquidity pool. By doing so, LPs can capture trading opportunities as prices oscillate between extremes and the center.
Customized Strategies
LPs with specific trading strategies or market insights can leverage the flexibility provided by the custom price range option.
Approach: LPs can define their desired price ranges based on their strategies. For example, LPs employing a breakout trading strategy may concentrate liquidity near key support and resistance levels to capture trading opportunities when price breakouts occur.
Fees
Different fee tiers can be used when providing liquidity to the pool, which allows Liquidity Providers to maximise profits. The fee is mostly dependent on the pool pair but it can be set by the LP's too. If the volatility of the assets are higher or those traded rarely, the fee can be higher and the fee is lowest for the stable pools (as price doesn't change much for them). There are four different fee tiers that can be chosen by the liquidity Providers.
0.01% - Tightly pegged tokens (stable assets)
These assets are designed to maintain a stable value, such as stablecoins pegged to a fiat currency. Stable assets usually have lower price volatility, and the peg ensures that their value remains relatively constant.
0.05% - Pegged tokens
This fee tier is suitable for pools that involve tokens with a peg to another asset, such as tokens pegged to the value of a commodity or another cryptocurrency.
0.3% - Works for most of the token pairs
It is suitable for pools that involve commonly traded assets or assets with moderate volatility. It is often selected as a default fee tier for many token pairs.
1% - For exotic token pairs (high volatility)
Higher volatility assets carry a higher risk of impermanent loss, and liquidity providers may demand a higher fee to compensate for that risk. This tier incentivize liquidity providers to provide liquidity to these higher-risk pools and capture potential higher returns.
To know about CLAMM protocol, you can check the below page.
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