Amplified Pools
Concentrated liquidity for greater capital efficiency
Last updated
Concentrated liquidity for greater capital efficiency
Last updated
Amplified pools are customized pools which provide liquidity only within a predefinied price range of a given token pair.
Building upon the autonomous trading mechanism of AMMs, amplified AMMs create denser pockets of liquidity, maximizing the capital efficiency of a pool within a given range of prices, and dramatically reducing price slippage for traders.
It gives multiple use cases such as:
Pools with similar token pairs with maximized capital efficiency
Leveraged pools within specific price range
One-sided pools which only require one kind of token to be deposited for liquidity providing (with stableswaps)
More sophisticated liquidity providing methodology for professional market makers
A basic pool provides liquidity in all price ranges, which means that a user can buy or sell a token denominated in any price. At any given price, the trading volume of a pool is compromised as the liquidity of the pool is spread across all price ranges.
With amplified liquidity, liquidity can be concentrated in specific price ranges. This ensures sufficient liquidity provision even for pools with little capital, enabling users to enjoy higher capital efficiency.
For example, applying an amplification factor = 10 on Demex sets the price range of a liquidity pool to be between y to z.
Introduced by Curve in late 2019, liquidity amplification to AMM pools is not a novel concept. As one of the first protocols to launch amplified pools in the Cosmos ecosystem, Carbon’s introduction of amplified pools will fill a sorely missing gap.
While Curve's stableswap formula is implemented with stablecoins and wrapped-asset pairs only, Carbon’s liquidity amplification module follows the formula advanced by Kyber Swap - where the balance of each pool asset is amplified via an amplification factor, leading the pool's price curve to achieve lower slippage using amplified virtual balances.
The graph below illustrates the behaviour of two AMMs - a standard one (in blue), and an amplified one (in red):
As seen from the graph above,
If we program an AMM to only take trades that utilize a certain level of its total liquidity, the AMM is able to use a larger share of this liquidity to reduce slippage on trades.
Introducing liquidity amplification to the pool decreases the influence transactions have on the pool, providing lower slippage and arbitrage opportunities.
Without amplification, a standard AMM with $100,000 in its reserves will incur 10% slippage on a $10,000 trade.
With amplification, by introducing a 20x amplification, the slippage on the same trade will be reduced to 1%.
Slippage occurs when a pool is imbalanced, creating an arbitrage opportunity for one to balance the pool. When there are zero transaction fees applied to the pool, abritrage = slippage.
Introducing liquidity amplification to pools reduces the influence transactions have on them, providing lower slippage & arbitrage opportunities. With amplified liquidity, Carbon is primed to be Curve of Cosmos, turning idle capital into not just productive but hyper-productive capital - generating higher real yield to liquidity providers whilst providing tighter spread to traders.
Compared to the basic pool with the same amount of capital, the amplified pool (with 10x amplification) provides 10 times liquidity than the basic pool in the same price range. This is because the amplified pool only provides liquidity within a specific price range, concentrating liquidity within this range, empowers liquidity providers to provide custom amounts of liquidity in selected price ranges.
On Carbon, the price range is selected and determined by adjusting the liquidity amplification factor, which then displays the corresponding range available. Individual positions are aggregated together into a single pool, forming one combined curve for users to trade against.
This will unlock tremendous capital efficiency gains for liquidity providers who can manually adjust their exposure, ensuring lower trade slippage at the same time. That’s not all - On top of this, the support for concentrated stablecoin pools will enable users to swap the Carbon stablecoin with other stablecoins without much slippage as well.
Check out this article to learn more about amplified liquidity on Carbon.
Similar to basic pools, an amplified pool typically has 2 tokens in the pool. For amplified pools, this holds true only if the price is in the range of the pool. Once the price exceeds the price range, only a single kind of token remains in the pool.
For an amplified pool with 10x amplification factor (with price range between y and z), when the price falls below y, the pool will only contain A tokens. This is because the amplified pool sells out B tokens, and buys A tokens at the price above y.
On the contrary, if the price is above z, then the pool only has B tokens. This is because the pool sells A tokens and buys B tokens at the price below z.
In such cases where the pool prices go out-of-range, users can deposit or withdraw to/from the pool with only a single kind of token.
A pair of tokens can have multiple liquidity pools - For example, one basic pool and multiple amplified pools of varying amplification factors.
The following example illustrates one basic pool and one amplified pool providing liquidity to the market at the same time.
Thanks to the higher capital efficiency of the amplified pool, traders benefit from much lower slippage. In the out-of-range price ranges of the amplified pool, liquidity can still be provided by the basic pool, facilitating trading in the region.
