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Last week we published concentrated liquidity pools – a brand new pool type for Trident that gives our users even more flexibility in what they can do with sushi and earn income from it. In this article we will walk through the new user interface and learn how to create and interact with a concentrated liquidity pool and how to manage a position within a pool.
What is a concentrated liquidity pool?
First, a brief introduction to concentrated liquidity pools: This is a special type of pool that allows a Liquidity Provider (LP) to deploy its capital within a price range that it defines. This custom price range is the range from which LPs earn fees, as opposed to fees for merely providing liquidity to the pool (the traditional model). If the price of the assets in the pool deviates outside of this price range, the LP’s position will no longer be charged until it either adjusts the range itself or the price naturally returns to within this range. Concentrated liquidity pools improve capital efficiency, reduce slippage and ensure sufficient liquidity is available where it is needed most.
How to create a concentrated pool of liquidity
Creating a concentrated pool of liquidity on the new interface is a short and simple process, especially if you have already created pools on Sushi. Let’s walk through the creation together:
Step 1: First, go to the Sushi app and select “Enter App” in the top right. Next, make sure your wallet is connected and select the Pools tab in the top left corner of the screen to go to the pools page.
Select the New Location option.
Step 2: On the Pools page, select the New Location button as if you were creating a different pool type. This will take you to the Add Liquidity page, where you can create a concentrated liquidity pool (or position in one).
Step 3: Next you need to select the network you want to create the pool in and the pair you want to create the pool for.
Step 4: Then select the fee level you want your pool to comply with. This can be between 0.01% and 1.00%. As a general rule of thumb, lower fee tiers are better for more stable pairs, while higher tiers are better for more exotic (read: more volatile) pairs. If you’re unsure which end of the spectrum to choose, 0.30% is a solid middle ground.
Up until this point, creating a concentrated liquidity pool was the same as creating any other type of pool on Trident – here are the differences. After selecting the fee tier, you will be prompted to both initialize your new pool and set your price range at which you will earn fees.
Step 5: Simply customize the desired range to provide liquidity by using the two input fields to define the range’s minimum and maximum values. This will automatically update the price range visualization on the screen for verification. Keep in mind that the price range you select represents the extent to which you expect the price to fluctuate over time. Don’t rush, make an informed decision.
Preview your new position before executing it
Once you’ve set an appropriate price range, initialize your new pool by setting the starting price (which must be within the range) and specifying the amount of liquidity you wish to provide for each asset. Now that everything is filled out, select “Preview” to get a final summary of the pool you want to create. If everything looks correct, all you have to do is select “Add Liquidity”.
Note: If you are adding liquidity to a pool that already exists, you will not see the option to initialize the pool.
Congratulations, you have officially created a concentrated pool of liquidity!
How to create positions within existing concentrated pools of liquidity
You can easily open a position in a concentrated liquidity pool from the Pools page, where you can browse all available pools filtered by chain; Select the SushiSwap V3 filter to find the concentrated liquidity filters. Selecting an individual pool on this screen will take you to that pool’s specific page, showing all relevant pool-specific analytics and rewards, as well as options to create and remove positions within it.
Step 1: As before, go to the Sushi app and select “Enter App” in the top right. Next, make sure your wallet is connected and select the “Pools” tab in the top left corner of the screen.
Step 2: This time, check out the available pools to see if there’s one you want to provide liquidity for. You can search for specific assets in the search bar above the pools or use the numerous filter options to make it easier to find exactly what you are looking for. Once you’ve found the appropriate pool, you can select it to bring it to that pool’s specific page.
There are countless pools to choose from
Step 3: From here, adding a concentrated liquidity position is the same as before: there are tons of different fine-tuning options to choose from, all of which you should explore and try before making your decision. Once you’ve had a chance to poke around and determine the price range you want to provide liquidity for, use the min and max inputs to define the limits of the range and select “Provide Liquidity”. That’s all there is to it!
How to remove your liquidity from a concentrated liquidity pool
If you want to remove your liquidity from a pool, it’s very simple: first navigate to the relevant pool page and connect your wallet to the correct network. From there, select the “My Positions” option at the top of the screen.
View your existing jobs under My Jobs
Select the pool you want to remove liquidity from and click on it. This will take you back to the specific page for that position. All you have to do now is select the “Reduce Liquidity” tab at the top, choose the percentage of liquidity you want to remove, and then select “Remove”.
You should now have your original balance back in your wallet!
Manage your position
Providing liquidity within a predefined price range has its advantages. The main one is that it is much more capital efficient and you can get more return on fees (percentage) than other pool types with less capital. However, this also means that the position must be monitored more actively than is the case with a conventional LP position; Remember that if the price deviates outside of this range and that part of your position (half of the pair) is sold and converted into the other half of the pair, you will not earn any fees. Vigilance is the best strategy when it comes to concentrated liquidity positions.
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