Introducing: Liquidity Book
Next Generation AMM Protocol
Trader Joe Launched on the 4th of July 2021 and has since facilitated trading volume of over $88bn, generating over $265m in revenue which has been 100% paid out to Liquidity Providers (LPs) and Token holders. This success, has helped to contribute to the growth and development of the Avalanche Ecosystem.
Joe v1 has been built on the popular x*y=k Automated Market Maker (AMM) design that saw exponential growth and adoption across DeFi. Joe v1 offers users an accessible and convenient way to provide passive liquidity and trade tokens. However, this protocol design does have drawbacks, such as capital inefficiencies and high risks of Impermanent Loss.
Enter a new protocol: Liquidity Book. Developed by the core Team at Trader Joe, Liquidity Book is a new approach to AMMs that aims to fix the inefficiencies of x*y=k while still retaining the accessibility that has been the cornerstone of success seen in prior AMM models.
Trader Joe set out with a mission to innovate at the frontier to make DeFi more accessible. The Liquidity Book Protocol achieves just that, innovation for AMMs and greater accessibility for DeFi.
Liquidity Book Introduces:
Completely New Architecture
Separates liquidity for a pair into distinct price bins and aggregates those pools for each pair to combine into a market
Composable architecture, thanks to the fungibility of the Liquidity Book tokens that closely resemble ERC-20 tokens
Liquidity deposited into LB comes with a price located liquidity receipt, enabling new product integrations
Launches with one pool for each pair, but allows for the creation of multiple markets with different bin steps in the future
Novel Volatility Accumulator
Internal mechanism that measures market volatility
Can react to market movements without delay or lag, providing a highly accurate mechanism that measures instantaneous volatility
No reliance on external data or algorithms
Increases during market volatility and decreases during calmer periods
Helps to mitigate Impermanent Loss suffered by LPs during market turbulence
Customisable parameters allow for implementing variable fees that are tailored for each market
Liquidity Book Features:
Improving capital efficiency for LPs by enabling higher returns on capital
Reduces price impact for traders with zero to low slippage trades
Smart routing between v1 & v2 ensure traders always receive the best rates
Zero JOE emissions required to support pools opened on Joe v2
Efficient Liquidity Management
Ground breaking design allows users to adjust positions in one swift transaction, vastly improving efficiency over existing solutions in the market and opening up the possibility for highly efficient vault strategies
Bespoke Liquidity Positions
With the Liquidity Book AMM LPs are entirely in control, with the ability to create any type of Liquidity structure. Deploy unique and custom strategies, to fit any risk profile and goal
Dive down to learn more about how the Liquidity Book protocol works or check out the whitepaper for a deep dive: Whitepaper Link
Capital Efficiency and Swap Rates
Zero slippage swaps for any trade size
One of the key changes that the Liquidity Book protocol will implement is Concentrated Liquidity. This way of stacking liquidity offers vast improvements over the traditional AMM models by being very capital efficient. Users can choose what prices they want to provide liquidity for instead of utilising the 0 to infinity range.
Joe v1: An LP can deposit liquidity into the USDC/USDC.e pool and the liquidity will be spread over $0 to infinity price range
Joe v2: An LP can deposit liquidity into the USDC/USDC.e pool and decide exactly where that liquidity will be placed, eg between the price of $0.95 and $1.05
Further examples of concentrated liquidity positions can be seen below:
Why would an LP want to concentrate their liquidity?
Because there are much fewer tokens sitting idle and contributing nothing to swaps. Concentrated Liquidity leads to traders getting considerably better prices with reduced or even zero price impact, even in pairs with relatively low TVL. LPs will also see significant benefit, receiving much more fees with fewer tokens deposited, as long as their liquidity is in the active price range.
Liquidity Book will smartly route trades through new concentrated and traditional liquidity pools for even better prices. It will also provide on-chain oracles with all values required by those who want to trade algorithmically.
The next generation of DEX Innovation
In Liquidity Book, liquidity is separated into distinct bins, each with a specific price assigned to it. Individually bins act as constant sum pools containing either one of the tokens in the pair (or both). This is an example of a bonding curve for one of the bins containing tokens X and Y:
Liquidity Book combines bins into one structure, aggregating liquidity from all of them. The current market price of a token X can therefore be described as a price assigned to a bin that contains both tokens X and Y (P14 in the picture below). All bins below that would consist of token Y (P11-P13) and all bins above of token X (P15-P17). Once liquidity from the current bin is completely depleted (that is it consists of only one of the tokens), the price moves to the next one. Because each bin represents a fixed price point, the price impact while swapping occurs only during bin changes.
All liquidity is represented by tokens similar to the ones of the ERC-1155 standard. Tokens are assigned an id matching the bin they are part of, and apart from that one difference, they closely resemble fungible ERC-20 tokens used in existing decentralised exchanges and widely supported in the DeFi ecosystem.
Deploy any liquidity structure to fit your strategy
The Liquidity Book design allows LPs to easily develop custom strategies matching their own goals and risk profile. Instead of having one pool with unbound price ranges, Liquidity Book has multiple separate bins with different prices that can be used as building blocks for a liquidity position. Those looking to capture maximum fees and willing to take some risk can deposit all their tokens into one bin. Others can choose a more balanced approach with bespoke liquidity structures. You can see some examples of how different LPs might set up their liquidity in the next video. Basically, you can pick any amount of specific bins, and you can deposit any amount of liquidity into those bins, the possibilities for your liquidity positions are practically limitless.
Efficient Liquidity Management
Adjust any sized position quickly and with low cost
Unlike existing concentrated liquidity models, assets deposited into LB Pools will come with fungible token receipts. One key benefit of a fungible token receipt is that LPs can easily re-balance positions in one transaction, whereas on Uniswap v3, for example, you may be required to make several transactions to adjust your single position. LPs will typically want to adjust their position when providing concentrated liquidity, to keep their assets within active trading ranges so they can continue to accrue trading fees. Here is how it could look with multiple users changing their positions over time:
In the near-term, automated vaults may be built that will take care of position management completely and help users save time and money by intelligently deploying their tokens in the most efficient manner. This innovation is also highly beneficial to the vault strategies themselves as many vault strategies will adjust positions a number of times per day, lowing transaction counts needed to rebalance will help to reduce gas fees and thus, reduce strategy execution costs.
Measuring the Volatility
Novel Mechanism that measures instantaneous volatility
One of the biggest innovations coming to Avalanche and DeFi in general with the release of the Liquidity Book is the Volatility Accumulator. It is a novel way to measure instantaneous market volatility by tracking how many bins a swap crosses and how much time passed since the last swap. Every bin change a swap makes represents a fixed price increase/decrease, there is no need to rely on external data feeds for this measurement either. When impactful swaps occur in short succession, the accumulator ramps up. When activity slows down, it starts decaying, and if no swaps occur during a specific timeframe, it resets. Our next video shows how the volatility accumulator changes in response to market activity.
Innovative approach to mitigate Impermanent Loss
Providing liquidity for concentrated liquidity exchanges is a risky business. Research shows that ~50% of depositors on Uniswap v3 suffer negative returns due to Impermanent Loss, which occurs when the prices of assets in the pool deviate from their initial ones. For some of the pairs, as many as three-quarters of all liquidity providers lose money compared to simply holding tokens in their wallets.
Impermanent Loss can be viewed as a cost of the price discovery, so it is highest during the most volatile times when the market tries to correctly price assets in the pair. To protect LPs from Impermanent Loss, the Liquidity Book implements the Variable Fee. It is taken during each swap in Liquidity Book and depends on the Volatility Accumulator to track market volatility. As can be seen in the following video, if volatility is high, the fee ramps up to better compensate users for the risks and costs associated with liquidity provision. On the other hand, when volatility is low, the fee also decreases.
Even with the Variable Fees, retail users are unlikely to notice a big difference in swap rates. In fact, the fees in Liquidity Book can be lower than in exchanges that use fixed fees for their swaps.
Trader Joe takes security very seriously and has worked with a number of highly respected firms that have conducted multiple audits across all currently deployed protocols. We are happy to announce that the Liquidity Book protocol is currently undergoing an audit being conducted by ABDK Consulting.
Twitter Spaces: AMA
On Wednesday the 31st at 7pm UTC an AMA will be hosted on Twitter Spaces where the Core team will discuss the Liquidity Book protocol and answer any questions you may have. If you would like to submit a question ahead of this session please use the below link form:
If you are interested in integrating or building on top of the Liquidity Book protocol, you can get in touch with us by messaging General Manager: DavideFi
About Trader Joe
Trader Joe is a one-stop-shop decentralized trading platform native to the Avalanche blockchain. Trader Joe builds on the frontier of Decentralized Finance, providing users with an innovative and unique trading experience that is both seamless and accessible.
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