V3
How does V3 manual mode work?
V3 Concentrated Liquidity allows liquidity providers on Arch to specify custom price ranges for their tokens rather than distributing liquidity evenly across the entire price spectrum. This enables providers to concentrate their capital in price ranges where they anticipate higher trading activity, while still maintaining liquidity in a broader price range rather than across the whole spectrum.
In simpler terms, concentrated liquidity enables liquidity providers to focus their capital on preferred price points, rather than spreading it across the entire range. It’s similar to only sharing your favorite toys with friends, rather than distributing all of your toys.
Examples of the mechanics
What distinguishes Auto mode from Manual mode?
Manual mode is designed for experienced liquidity providers who wish to control the price ranges for their liquidity allocations.
Auto mode employs automated strategies to manage liquidity concentration, adjusting price ranges for users based on market activity.
From the user's perspective, the process is straightforward—if the pair you’ve provided liquidity to is incentivized with market maker rewards, you will receive additional rewards on top of the trading fees, which can be accessed in the positions section of the dApp interface.
What improvements does V3 bring for traders and liquidity providers?
In V2, liquidity providers deposited equal amounts of two assets (50:50) into a liquidity pool, which facilitated trades between those assets. This often led to idle capital, as the liquidity provider’s funds were not always fully utilized. Additionally, fixed asset ratios limited trading flexibility and increased trading fees.
V3 benefits liquidity providers and traders by allowing for more efficient trading and minimizing slippage. Traders can now execute swaps at prices closer to the market rate, while liquidity providers can earn higher fees by focusing liquidity where there’s more demand.
How does V3 improve the protocol?
Attracting more liquidity providers: V3 Concentrated Liquidity (CL) provides higher APRs, making liquidity provision more attractive to potential LPs.
Increased trading volume: CL leads to tighter spreads and better capital efficiency, which attracts more traders to the platform and increases trading volume. More volume translates into more fee revenue for the protocol.
Key differences between V2 and V3:
V2: 50/50 ratio between assets in the liquidity pool.
V3: Customizable price range for liquidity provision.
V3 allows liquidity providers to concentrate liquidity within specific price points, improving capital efficiency. This model offers more precise pricing and reduces slippage, particularly in volatile markets.
V3 also allows traders to specify price ranges for their trades, making it easier to execute orders under preferred conditions and adjust positions as market conditions shift.
V3’s flexibility in liquidity position management provides greater control over tick spacing, offering higher capital efficiency and lower gas costs compared to V2.
Does Arch charge higher fees for swaps using concentrated liquidity, and if not, how can APR be higher in concentrated liquidity?
Swap fees may not increase directly due to the concentration of liquidity, but the benefits for liquidity providers are apparent. By concentrating capital in specific price ranges, LPs can earn a higher share of the fees relative to their contribution.
For example, imagine two pools: one using concentrated liquidity (V3) and the other using full-range liquidity (V2). Both pools facilitate the same trading volume and earn the same fees. However, in the concentrated liquidity pool (V3), since there’s less idle capital, the fees are distributed among a smaller amount of liquidity, potentially resulting in higher returns for providers in the concentrated pool.
How to select price ranges for liquidity provision?
Consider how much price movement is expected throughout your position’s lifespan.
Be prepared to actively manage your position as market conditions change.
Factor in the costs of adjusting your position.
If prices fall outside your selected range, your position will concentrate in one asset, and you will stop earning fees until the price returns to the designated range.
Providing liquidity across the entire range is possible, but it generally results in a lower return than concentrating liquidity within a narrower range.
Range presets
Full range: Liquidity is provided across the entire price range. Useful for assets with high volatility or wide price movements.
Wide range: Liquidity is concentrated in a broader price range, ideal for assets with moderate volatility.
Common range: Liquidity is focused on both the buy and sell ranges near the current market price.
Narrow range: Liquidity is concentrated near the current market price, ideal for stable assets with relatively low volatility.
Will my position be liquidated if the price moves beyond my set range?
If the price of a trading pair moves outside the specified range, your position will consist solely of the less valuable asset in that pair. For example, if your ETH/USDC range is set between $555 and $1555, and ETH falls to $550, your position will hold only ETH. If ETH rises to $1560, your position will hold only USDC.
When the price remains outside the selected range, your position will be considered "out of range" and will not earn any fees until the price returns to the specified range.
How is APR for trading fees calculated?
To calculate the APR, we gather the total active TVL and the fees earned approximately every 10 minutes. We then calculate the average active TVL over the past 7 days (or since the pool’s launch if it’s been live for less than 7 days). Using the fees earned during this period, we calculate the APR.
Can I create a custom token pair in V3?
Yes, you can create a custom token pair by providing liquidity to a new combination of tokens that do not have an existing V3 pool. You need to select the tokens, set a price range, and deposit the required amounts of each token. Once the pool is created, others can also add liquidity to the pair.
Can I withdraw my concentrated liquidity at any time?
Yes, you can withdraw your liquidity position at any time.
How are fees earned and distributed in concentrated liquidity pools?
Fees are earned from swap transactions that occur within the price range specified by the liquidity provider. These fees are automatically distributed based on the amount of liquidity provided and the duration of the liquidity provision. In manual mode, pending rewards can be harvested via the V3 position management panel, while in auto mode, the LP fees are automatically compounded into the pool.
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