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6 Discrete and Centralized Liquidity Construction Methods, How Liquidity Book Changes the DeFi Pattern on Avalanche

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How Trader Joe's Liquidity Book will create more possibilities for liquidity providers on Avalanche.

Original author: @SteakHut Finance, @pelano.avax

Original compilation: Peter Pan @BlockBeats

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In August of this year, Trader Joe launched the v2 version of "Liquidity Book", which introduced centralized liquidity into DEX. “centralized liquidity” approach.

By grouping liquidity, the liquidity of asset pairs is arranged in different "discrete Each box has a specific price, enabling users to provide liquidity to multiple boxes at the same time.

Specifically speaking, Liquidity Books’ innovations are mainly reflected in the following four aspects.

1) Discrete Liquidity Box

Liquidity Book uses the Bins design and does not have a scale design like Uniswap V3. Only the active price box contains two tokens, the box below the price range of the active box will only have Token Y, and the box above will only have Token X.

2) Zero slippage

Liquidity Bins design also brings With zero slippage, users can trade with zero slippage as long as they are in the current active box. Slippage will only occur when the assets in the active box are exhausted and the price needs to be moved to another box.

3) Greater flexibility

Unlike Uniswap V3, Liquidity Book wraps LP positions in a more general contract, similar to the ERC-1155 standard, making it fungible, like ERC-20 Token.

4) Volatility accumulators and variable fees

One downside of providing centralized liquidity is the increased impermanent loss resulting from a narrower liquidity range. Liquidity Book mitigates this by using volatility accumulators and a variable fee mechanism.

Volatility Accumulator is Liquidity Book's way to instantly determine market volatility without the need for external data sources way, this happens every time someone makes a swap.

The total exchange fee charged by LP has two parts, one is the basic fee and the other is variable fees. The base fee represents the lowest fee rate for all swaps, with a maximum value equal to the price box interval. Variable fees vary with market conditions and depend on volatility accumulators. Additionally, variable fees make providing liquidity in volatile markets more attractive to LPs, thus helping to maintain liquidity depth when it is most needed.

Next, let’s break down the other types of discrete centralized flow Sexual way:

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Gaussian

This is a more balanced way to provide liquidity, we can see that liquidity is concentrated around the active trading range and gradually decreases at the end of the price range.

Concentrating liquidity around active price ranges allows users to obtain higher transaction fees , a more spread-out model allows the strategy to capture a larger price range and taper off at the end of the price range.

Concentrated

Concentrating liquidity in a smaller price range can be seen as a more risk-appreciative approach, but concentrating liquidity around active prices can obtain a higher share of swap fees, thereby Achieve higher APR.

However, as the price changes, the user's position will be priced outside the valid position , and will no longer receive transaction fees. Furthermore, since only active positions own both assets, the price movement will cause the LP position to be 100% composed of the underperforming asset.

Volatile

Volatile distributions allow transaction fees to be captured at extreme price range intervals, which typically have lower liquidity, allowing LPs to potentially capture a higher share of transaction fees in less active bins.

Evenly distributed

In times of high volatility, this equal allocation strategy allows LPs to capture those profitable deals. At the same time, due to the wide spread of positions, users are able to secure transaction fees without worrying about pricing beyond active positions.

However, large price ranges lead to inefficient liquidity allocation, which means that trading Fees have a lower APR.

Range Order

Liquidity Book's discrete centralized liquidity allows the liquidity of asset pairs to be arranged in different "Range Orders" (discrete price boxes), where positions are represented by LBToken, which is compatible with the ERC-20 standard. And is functionally valid and replaceable.

So these LBTokens can be seamlessly stacked on top of each other to form a new "vertical liquidity" structure that enables users to easily remove assets from, add assets to, or move assets between price boxes.

In addition, Liquidity Book also allows users to automatically perform DCA (Dollar Cost Averaging: average cost method) exchange. Doing this with LBToken pays no swap fees, and effectively earns swap fees.

1) Buy Range Order

Since only the active price box contains two tokens, LPs can concentrate their liquidity in the lower price range to effectively pass the lower price The goal is to buy tokens that perform poorly.

For example: AVAX-USDC pool LP can concentrate USDC at about $10, when the pool When trading below this price, USDC will be converted to AVAX. LPs can then withdraw liquidity consisting only of AVAX Token.

2) Sell Range Order

LP can concentrate its liquidity on a higher price range to effectively sell outperforming Tokens for profit.

For example: AVAX-USDC pool LP can concentrate AVAX around $100, when the pool trades Above this price, all AVAX are converted to USDC. LPs can then withdraw liquidity that now consists only of USDC.

From Liquidity Book to DCA

Similar to Range Order, LPs can deposit a single asset into multiple boxes around their price target, which allows users to buy or sell Tokens leading to their target.