Concentrated Liquidity

Position Exchange introduced Liquidity V3 which is concentrated liquidity. This means that liquidity providers (LPs) are given the ability to concentrate their liquidity by “bounding" it within an arbitrary price range.

Benefits Concentrated Liquidity V3 Brings about

  • Concentrated liquidity in Position Exchange can help to increase overall liquidity on the platform, leading to better prices for users and tighter spreads.

  • Liquidity concentration improves the pool’s capital efficiency

  • Concentrated liquidity can also help to reduce volatility in the prices of assets listed on Position Exchange, making it easier for users to trade and execute orders.

  • It allows LPs to approximate their preferred reserves curve, while still being efficiently aggregated with the rest of the pool.

  • You can add or remove liquidity whenever you want.

  • In case you decrease all liquidity out of Liquidity NFTs, your NFTs still exist. This means you do not need to open new NFTs with high costs to add the same token later.

  • It helps to decrease your impermanent losses. The limited range means you earn fees if the market price is within your selected range. In this new system, the key to optimizing returns is that liquidity providers will need to update their price ranges according to the price changes in a volatile market. You can change the price range anytime you think you should.

Capital Efficiency of Concentrated Liquidity V3

We want to bring the main function of concentrated liquidity as a mechanism to advance capital efficiency and to make up for the shortage of the original x*y = k formula underlying the standard automated market maker model.

Within Liquidity V3, liquidity can be spread across price intervals, resulting in so-called concentrated liquidity positions. Liquidity providers can open any number of positions in the pool and thus create their own price curve based on their personal market view using what are known as called range orders.

Concentrating liquidity around the current price and updating custom positions as prices change has proven to maximize profits while exposing much less capital to the risk of asset depreciation. It's a purposeful and effective strategy. The narrower the range you set for your concentrated liquidity position, the more fee revenue you can earn and vice versa. LPs can choose to provide liquidity across the curve, but they won't earn as much trading fees as they would by choosing a smaller price point. However, less capitalized providers may have to pay higher costs to provide liquidity due to gas costs associated with price adjustments.

Here is a guideline on how to interact with Position Exchange Concentrated Liquidity:

Initialize a new pool

Add and Remove Liquidity

Shift range

Increase Decrease Liquidity

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