Liqudity Book
Last updated
Last updated
In conventional Automated Market Maker (AMM) systems, liquidity is typically spread evenly across the entire price spectrum, extending from 0 to infinity.
However, there exists an opportunity to enhance capital efficiency, particularly for specific pairs where trading tends to occur within a narrow range. Take the USDC/USDT pair as an illustration, where the majority of trading activity transpires between $0.99 and $1.01. In such scenarios, liquidity outside of this range remains largely idle and could be more effectively utilized elsewhere.
Enter the Liquidity Book (LB) solution. Here, liquidity providers have the flexibility to allocate their liquidity within a designated price range of their choosing, a concept referred to as concentrated liquidity. Returning to the USDC/USDT example, if a liquidity provider opts to supply liquidity between $9.99 and $10.10, they will accrue trading fees as long as the price remains within that specified range.
This approach enables liquidity providers to optimize their capital allocation, directing it towards areas where trading activity is most prevalent, thereby maximizing potential returns.
The Liquidity Book introduces a novel method for distributing liquidity, employing discrete bins of fixed width. Within each bin, liquidity can be traded at a fixed price. Each bin corresponds to a single price point, with the difference between consecutive bins defined as the bin step.
For instance, consider the USDC/USDT pair once more. If the current price is $1 and the bin step is set at 1 basis point (0.0001 or 0.01%), then the subsequent consecutive bins would be calculated as follows:
$1 * 1.0001 = $1.0001
$1.0001 * 1.0001 = $1.00020001
This progression follows a geometric sequence: $1.0001^n.
Bin steps are configurable parameters determined by the pool creator. Multiple markets of the same pair may exist, differing only in their bin step. Liquidity pools in the Liquidity Book are uniquely identified by their tuple (X, Y, s) of pooled assets, where X and Y represent the assets, and s represents the bin step.
