Introducing concentrated liquidity with ApeSwap V3. Improving capital efficiency for the protocol, partners and users
Improving capital efficiency for the protocol, partners and users
ApeSwap is pleased to announce that starting April 4th, the latest industry standard approach to liquidity positions, known as concentrated liquidity, will be available on ApeSwap’s decentralized exchange in the form of ApeSwap V3.
What is concentrated liquidity?
ApeSwap’s decentralized exchange has been using the traditional UniSwap V2 liquidity model since its inception. V2 liquidity positions cover the full range of the constant product formula, which means that all liquidity positions in these liquidity pools are equally reserved over the full range of relative prices of the applicable token (from $0 to infinity). As a result, the assets within the majority of V2 liquidity positions are never used as the relative prices of the tokens are often within a specific, more constrained range.
Because liquidity is sparsely spread across all price points, liquidity providers (LPs) only earn fees on a small portion of their assets, and traders are subject to a higher degree of slippage when trading tokens.
Unlike V2 liquidity positions, V3 liquidity positions are tied to a set price range, making them much more efficient in terms of earning trading fees. LPs set up concentrated positions and users can trade against the combined liquidity of all these individual concentrated positions. Trading fees charged within a given price range are split pro-rata by LPs in proportion to the amount of liquidity they have contributed to the selected price range and fee option.
The difference in price curves for V2 and V3 liquidity.
Why is ApeSwap updated to V3?
The concentrated liquidity allows for much higher levels of capital efficiency for both ApeSwap as a protocol and its users.
Other decentralized exchange platforms have implemented this approach and ApeSwap prides itself on offering its users the most innovative solutions in DeFi. With ApeSwap V3, the protocol can offer more opportunities to existing users and attract new users as part of its effort to establish itself as an industry leader for sustainable DeFi.
Obie Dobo, Head of Product at ApeSwap, said: “ApeSwap’s V3 Liquidity is a leap toward capital efficiency as we continue our efforts on multiple fronts for sustainable DeFi. The improvements that V3 offers impact our entire ecosystem. Liquidity providers gain more control. Users get better swap rates. Partners keep their finger on the pulse. Moving to V3 allows ApeSwap to adopt best practices and remain competitive in the fast-paced world of crypto.”
Benefits of Concentrated Liquidity
Upgrading to V3 allows the ApeSwap protocol to provide more benefits to a variety of stakeholders.
Liquidity providers, partners and exchangers can all use concentrated liquidity to maximize their opportunities and have a more complete and valuable experience with the ApeSwap DEX.
ApeSwaps V3 implementation, by chain
Now that ApeSwap has expanded to a total of five chains (BNB Chain, Polygon, Ethereum, Telos, and Arbitrum), the approach to concentrated liquidity will be slightly different on each chain. Please consult the table below for the ApeSwap implementation plan for each chain.
ApeSwap is also working with Wallchain to determine what features will be available through the bonus router. Stay tuned to ApeSwap social channels for more information coming soon.
How to create a V3 position
Starting April 4th, ApeSwap users can build a concentrated liquidity position on the ApeSwap DEX. Complete the following steps to create a V3 liquidity position:
1) Select the two tokens you want to include in the liquidity position and enter an amount of one token. The other token amount is automatically pre-filled.
2) Select a fee option from the available fee options (currently 0.01%, 0.05%, 0.3% or 1%).
When selecting a fee tier, users apply a strategy and see the percentage of liquidity for each fee tier. Lower fee pools are used more often, so volume can sometimes make up for the lower fees!
3) Select a price range by dragging the boundaries on the graph or manually entering a minimum and maximum price. The token amounts are updated automatically.
4) Select Preview to check your liquidity position.
5) Select Add to finalize your position.
Once the transaction is completed, you will receive an NFT of the position (more on V3 NFTs below). The position will earn trading fees from trades of this pair facilitated with V3 Liquidity as long as those trades are within the price range and fee tier selected for that position. Liquidity providers earn the appropriate fees calculated based on available pair liquidity and price ranges.
Earned trading fees must be REGISTERED in the V3 Positions tab.
Note that initially there will be no incentives to “stake” V3 positions (ie there will be no V3 farms).
About V3 NFTs
When a user opens a concentrated liquidity position, they receive an NFT that contains important information about the position. The following guide explains where to find this information on each NFT.
frequently asked Questions
How is the V3 fee calculated for each trade?
It is based on the liquidity pools you cycle through. Our router runs all the logic to get the cheapest overall fee for all factors.
What does the router aggregation model mean?
This means that instead of just using the Ape Router or Smart Router for a single trade, the V3 router might use multiple pools and across DEX (e.g. ApeSwap V2 & V3 at the same time).
Does this affect the swaps in any way?
Exchangers will see no difference in our DEX other than getting better rates.
Does this affect the Pro Trading platform?
No, ApeSwap Pro is not affected by this update.
Why would anyone choose a lower fee when creating a V3 position?
It depends on a farmer’s strategy. Lower fee pools are used more often, so volume can sometimes make up for the lower fees!
Do I need to migrate my existing liquidity to ApeSwap V3?
Absolutely not. V3 is a new product that will coexist with the current DEX liquidity. You should only create V3 Concentrated Liquidity positions if you are sure you know what you are doing.
If you have additional questions, please reach out through our Telegram and Discord channels.
Learn Crypto Trading, Yield Farms, Income strategies and more at CrytoAnswers
https://nov.link/cryptoanswers
Comments are closed.