Introducing the first major part of Gyroscope: Concentrated Liquidity Pools | by jooooo5as | Gyroscope Log

Concentrated Liquidity Pools (CLPs) are a new type of AMM designed to store gyroscope reserve values ​​while providing increased capital efficiency and a better user experience. Read on to learn about two types of CLP, why they’re useful, and how to test them.

Concentrated Liquidity Pools (CLPs) are the first major part of the gyroscope protocol.

CLPs are types of automated market makers developed by Gyroscope. They price the exchange of assets within a defined range to increase capital efficiency of market making in liquidity pools.

As part of the preparations for the launch of the Gyroscope Protocol, as commissioned by the communitytwo CLP types were introduced: 2-CLPs and 3-CLPs.

At the moment both types are currently live on Polygon where you can test them in limited mode (per address and per pool). Currently, the 3-CLP pool is also the first to offer liquidity for the new native BUSD on Polygon.

In the future, gyroscope reserves could be stored in CLPs. A third type of CLP will be announced at a later date.

Concentrated liquidity pools (CLPs) are AMMs that price the exchange of assets within the pool within a predefined price range. Your liquidity is limited to this area, which improves capital efficiency as pooled assets are not reserved for trading at unusual prices.

Gyroscope’s CLPs include pools of two or three assets:

– Pools with two assets

These are quadratically lumped liquidity pools, or 2-CLPs, named after the quadratically invariant curve. 2-CLPs are similar to Uniswap V3’s concentrated liquidity pools. But unlike Uniswap, a 2-CLP effectively offers a “single tick” where liquidity is spread evenly across a single active trading range.

Therefore, you can think of 2-CLPs as a simplified design of Uniswap V3. Design specialization in the most commonly traded areas of the included assets allows a pool to have (i) high capital efficiency, (ii) high gas efficiency, and (iii) simple UX.

Stylized representation of the capital efficiency gains of 2-CLPs

– Pools with three assets

These are cubic CLPs or 3-CLPs that support liquidity concentration for three assets and amplify the benefits of 2-CLPs. An intuitive way to think about 3-CLPs is to imagine a pool that combines two of the most impactful AMM innovations: multi-asset pools and concentrated liquidity.

Stylized representation of the capital efficiency gains of 3-CLPs

Assets that can be expected to trade in a common trading range are eligible for 2-CLPs and 3-CLPs. For example, like-to-like assets (like USDC/USDT) and also major currency pairs (like ETH/WBTC that have historically traded in a common trading range) can be suitable assets.

2-CLPs offer three main benefits:

• Increased capital efficiency: 2-CLPs improve the capital efficiency of the balancer ecosystem. 2-CLPs bring Uniswap V3 capital efficiency to balancer pools.
• Increased gas efficiency: 2-CLPs are designed for high gas efficiency. 2-CLPs use the efficiently calculable price formula for constant products [1]. 2-CLPs are also designed to integrate with balancers. Balancer V2 enables trades to be matched between multiple pools in a highly gas-efficient manner, laying the foundation for Balancer’s smart order routing [2].
• Simplified user experience: 2-CLPs are designed to be as simple as possible. The 2-CLPs design can be considered as a specialized variant of Uniswap V3, since the full generality of Uniswap V3’s tick system is not always needed. A simpler pool architecture means liquidity can be delivered with a less demanding user experience.

3-CLPs offer the same benefits as 2-CLPs – to an even greater extent:

• Increased capital efficiency: By concentrating liquidity on three assets, 3-CLPs are 50% more capital efficient than two 2-CLPs. They achieve this by aggregating the liquidity of all three assets into a single pool.
• Increased gas efficiency: Trading between three assets is more gas efficient than connecting two trades via two different 2-CLPs.
• Simplified user experience:3 CLPs provide an even simpler architecture and user experience.

The price caps of 3-CLPs work similarly to those of 2-CLPs. A key difference is that with 2-CLPs, the lower price limit within the pool cannot be reached for two assets at the same time. More details on the design of 2-CLPs and 3-CLPs can be found in this documentation.

Once Gyroscope has launched on mainnet, CLPs can be used in two distinct but mutually beneficial ways:

• Gyroscope Reserve: It is expected that most gyroscope reserves will be stored in some CLPs. Fee income from CLPs can help increase log collateralization ratios.
• Direct LPs: Since they will hold protocol assets, these CLPs are likely to provide significant liquidity. However, CLPs also remain open to direct liquidity providers. Direct LPs can thus access bootstrap, highly liquid pools in the most commonly traded areas (and in turn generate LP fee income). In addition, all trades are routed through Balancer’s Smart Order Routing.

CLPs help create a mutually beneficial cycle. The two uses of CLPs benefit from each other:

• Once reserve assets are deployed, LP individuals benefit from pools of substantial liquidity with high capital efficiency. This increases pool activity and therefore fee income.
• The gyroscope log, in turn, benefits as a small portion of CLP-LP revenue could be captured via a log fee.
• The interaction between LPers and deployed reserve assets creates economies of scale that have a positive effect on pool activity.

What are the risks of CLPs?

As with any smart contract, there is an inherent risk that an exploit or bug could compromise deposited assets. Code audits and testing can reduce this risk, but it can never be completely eliminated. 2-CLP and 3-CLP have been subjected to two audits. The first audit report conducted by Nethermind is available here, the second will follow shortly.

In addition, the high concentration of capital amplifies general risks common to AMMs, such as B. Adverse selection risk (lagging prices being “updated” by arbitrageurs) and strategy risk (commitment to a portfolio strategy).

The “amplification” of these risks comes from the fact that CLPs allow more trading at any price within the pool’s price range. 3-CLPs also have a new asset interaction risk.

The risks are described in more detail in the documents and terms of use. Please ensure you are aware of the risks and only interact with CLPs if you understand and accept the risks.

The gyroscope protocol consists of several key parts that are discussed in the 3rd/4th to be phased in in Q4 2022. The CLPs are the first of these parts. Two capped pools are now live on Polygon:

• A 2 CLP pool for WBTC/WETH with a price range of 11.1111-20.0000
• A 3 CLP pool of USDC/BUSD/USDT with a price range of 0.9985-1.0015

These CLPs have been reviewed and reports will be published shortly. However, audits aren’t always enough to ensure code is bug-free. As part of a responsible delivery process, these Pools with asset caps of $100,000 were used. To ensure their testing with multiple smart contract function calls (adding and withdrawing liquidity) is thorough, there is one additionally $20,000 cap per address. This avoids reaching the pool cap with just a few smart contract interactions.

Going forward, CLPs will be used to deploy gyroscope reserve assets and become widely available as a new type of balancer pool that anyone can build.

Test the launched CLPs on Polygon:

• Try 2-CLP and 3-CLP here

Please note:

The CLPs in place have asset caps that are set per address and per pool.

That’s because the current goal is *not* to achieve a high TVL, but to test the CLPs in production while enforcing risk controls.

Similar to the testnet walk-through, the gradual launch of gyroscope will make it easy for you to follow and explore the different components of the live gyroscope protocol, starting with 2-CLP and 3-CLP. Launching on Polygon has several advantages: it contributes to the broader drive to be present on all EVM-compatible chains, while also creating a cleanly separated “test-in-prod” platform with low cost for users to test the new ones pools.

Be among the first to try the newly launched Concentrated Liquidity Pools.

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