The use of concentrated liquidity was the response of developers and the community to the problems of conventional pools: large impermanent losses (impermanent loss) and inefficient use of liquidity. By providing liquidity to classic pools, users distribute it over the entire possible price range, while active trading actually takes place only within a fairly narrow price range. Using pools of concentrated liquidity, users can choose the minimum and maximum value of the price of the pair’s assets, within which their liquidity will participate in trading and, accordingly, bring increased profit to the owner in the form of commissions. Who will benefit from the new way of interacting with the crypto market and in what case is it profitable to use it?
The ratio of assets in the provided pair in case of concentrated liquidity will change depending on which border of the range is closer to the current price. When the price touches the lower border, liquidity will cease to be provided, and both assets will be completely transferred to the most volatile asset, the price of which has fallen. When the price touches the upper limit, liquidity also ceases to be provided, and both assets will be completely transferred to the least volatile asset, the price of which has changed less compared to the asset that has grown in price.
For example, a user provides liquidity in the ETH/USDC pair between $1.5k and $1.8k. If the price of ETH falls below $1.5k, all of the pair’s liquidity will be transferred to ETH. If the price of ETH rises above $1.8 thousand, then all the liquidity of the pair will be transferred to USDC.
Many projects are already working with concentrated liquidity: Orca, Tulip and Raydium on Solana, the Earn section of the Wirex application works with the concept to some extent. The pioneer and leader of the technology is Uniswap V3. The ASTL investment project does not yet provide such services within its own Web3-oriented crypto-ecosystem EcoMind, but the implementation of a similar form of liquidity provision is planned for implementation.
When is it beneficial to use concentrated liquidity opportunities? In some situations, it will be more profitable to provide liquidity, and sometimes it will be more profitable to simply buy an asset and wait for it to grow. If the price falls, the difference between the two options will not be significant. With a significant and rapid price growth, it will be beneficial to simply store the asset – by providing concentrated liquidity, users skip the growth phase of the asset after leaving the upper limit of the range. The key factor in the issue of profitability of concentrated liquidity positions is the duration of being in a given price range. Even a drop in the price of an asset that occurred after a long-term stay in the range will be compensated by the commissions received. Thus, by opening a position of concentrated liquidity, users bet on moderate volatility within a given range.
Range orders – the main or additional use case for the technology? Due to the nature of the transition of the pair into one asset at the edge of the range, there are additional ways to use the technology that are not immediately obvious. For example, the same Uniswap V3 interface can be used to create buy-stop and take-profit orders. Range orders (range orders) have a number of advantages compared to regular orders on centralized exchanges: almost zero probability of overshoot, no influence of excessively large orders on the price at the moment and their visibility in the order book, and of course, additional profit when executing an order in the form commissions collected while in the range.
Which is better: concentrated or ordinary liquidity? The use of concentrated liquidity is suitable for users who are ready to allocate additional time for active position management. For maximum efficiency, it is important to monitor the moments of entry and exit from the ranges, select the most “survivable” price ranges based on technical analysis and, last but not least, choose networks with the highest trading volumes for the desired pair. In cases where it is necessary to open a liquidity position and forget about it for a long time, it will be more convenient to use classic pools.
We remind you that there are only a few days left until the ASTL project successfully continues the promotion “Get an additional bonus up to +7% with your first investment”. The promotion is valid from 11/21/2022 to 11/28/2022 and implies the accrual of an additional bonus in ASTL for any investment. More information about the proposals of the ASTL investment project can be found on the website https://astl.io.