📊Concentrated Liquidity Market Maker

Concentrated Liquidity Market Maker

Introduction

Astro Swap introduces a revolutionary approach to liquidity management by enabling concentrated liquidity, where users can allocate their liquidity within specific price ranges. Traditional Automated Market Maker (AMM) protocols, which are prevalent in most decentralized exchanges, distribute liquidity uniformly across the entire price spectrum from zero to infinity.

The Inefficiency of Traditional AMM Liquidity Distribution

In conventional AMM systems, liquidity is readily available across the entire price spectrum, starting from zero to infinity, immediately upon deployment. However, this often leads to a substantial portion of liquidity remaining untapped in actual trades, resulting in inefficiency and underutilization. For instance, in stablecoin pairs where the trading price remains relatively constant, the liquidity outside the typical price range is seldom used. In many leading stablecoin trading pools, less than 1% of the total liquidity is actively engaged in transactions, leaving the rest idle.

Maximizing Liquidity Utilization with Concentrated Liquidity

Liquidity providers (LPs) naturally seek to maximize the utilization of their assets to earn more fees. Concentrated liquidity addresses this by allowing LPs to target their liquidity to specific, high-activity price ranges of a trading pair. For example, an LP might allocate all their liquidity to the (0.995, 1.005) range in a stablecoin pool. Since transactions frequently occur around the mid-price, this strategy significantly enhances liquidity efficiency and fee generation.

Finite Price Intervals and Multiple Positions

Concentrated liquidity transforms the traditional infinite price interval into a finite one. LPs can establish multiple positions within the same pool, each with different price ranges, allowing them to tailor their strategies and simulate varied price curves. This flexibility gives LPs the power to adapt their strategies to market trends and maximize their earnings.

Active Liquidity and Market Fluctuations

With finite price ranges set for positions, liquidity becomes 'active' or 'inactive' depending on market price movements. If the market price exits a position’s set range, the associated liquidity becomes inactive, ceasing to earn fees until the price re-enters the range. Conversely, when the price is within the range, the position is active, earning fees and comprising both assets in the pair.

Price Ticks and Liquidity Activation

In Astro Swap, unlike the continuous price model of traditional AMMs, prices are discrete, segmented by 'ticks.' Each tick signifies a 0.01% (1 basis point) change in price. Liquidity positions are defined by upper and lower price ticks, with the smart contract consuming liquidity within a tick range until reaching the next tick.

Tailoring Swap Fees and Tick Spacing

Astro Swap incorporates a nuanced relationship between tick spacing and swap fee tiers. Lower fee tiers allow for closer tick spacing, while higher tiers expand the potential active price tick range. For pairs needing finer price granularity, like stablecoins, tighter tick spacing is beneficial, moderating price impact during swaps and aligning with the needs of a stablecoin pool.

In summary, Astro Swap's concentrated liquidity model offers an innovative and efficient approach to liquidity management in cryptocurrency trading, providing LPs with greater control, flexibility, and potential for higher returns.