Liquidity and Yield farming
V3
How does the V3 manual mode function?
V3 Concentrated liquidity allows liquidity providers on MonoSwap to set custom price ranges for their tokens instead of evenly distributing them across the entire price range. This means that liquidity providers can concentrate their capital on specific price ranges where they believe there will be more trading activity, while still providing liquidity across a broader range of prices rather than the entire price range.
In other words, concentrated liquidity allows providing liquidity for specific prices you like, instead of sharing all your liquidity across the whole range. It's like only sharing your favorite toys, instead of sharing all of your toys, with your friends.
Example of the mechanics
For a volatile pair, an LP could provide liquidity for a price range of $1.10 - $1.30. This means that liquidity would only be used within that price range, allowing for more targeted liquidity provision. In a stable pair, a liquidity provider may opt to allocate their capital only to the range of $0.995-$1.005. This can result in deeper liquidity for traders around the mid-price, and the LP can earn more trading fees using their capital.
For traders and liquidity providers, what improvements does v3 bring?
Through V2, liquidity providers deposit equal amounts of two assets (50:50) in a liquidity pool, which is then used to facilitate trades between those assets. This can lead to idle capital, as the liquidity provider's funds may not always be utilized fully. Additionally, the fixed ratios of the deposited assets can limit trading flexibility and result in higher fees for traders.
V3 benefits liquidity providers and traders by allowing for more efficient trading and reducing slippage costs. Traders can now swap tokens at prices closer to market rates, while liquidity providers can earn higher fees for providing liquidity at the specific price points where there is higher demand
How does V3 enhance the protocol?
Attracting more liquidity providers: The benefits of V3 CL, such as higher APRs, make providing liquidity more attractive for potential LPs
Increased trading volume: CL leads to tighter spreads and improved capital efficiency. This attracts more traders to the platform, resulting in higher trading volume, which simply means more fee revenues for the protocol.
What are the main differences between V2 and V3?
The main differences between V2 and V3 are the introduction of concentrated liquidity, directional & dynamic volatility fees, limit orders, rebasing tokens, custom tick spacing, and improved capital efficiency in v3 as well as significant UI updates. These new features allow LPs to customize their exposure and potentially earn higher returns from trading fees compared to the previous version.
V2 = 50/50 ratio between assets bundled into LP
V3 = Custom range
V3 allows liquidity providers to concentrate their liquidity at specific price points, leading to more efficient use of capital and higher capital efficiency
V3 concentrated liquidity model allows for more precise pricing and lower slippage for traders, especially in volatile markets
V3 liquidity range orders can help traders execute trades more efficiently, as they can specify the price range they want to trade in ranges and adjust positions as market conditions change
V3 offers more granular control over liquidity positions, with the ability to create custom tick
V3 has lower gas costs and is more gas-efficient than V2
Does MonoSwap charge higher fees for swaps that use concentrated liquidity, and if not, how can the APR be higher when using concentrated liquidity?
The swap fees themselves may not necessarily change based on whether the liquidity is concentrated or not, but the benefits of concentrated liquidity come into play for LPs. By focusing your capital in specific price ranges, as an LP, you can potentially earn a higher share of fees relative to contributed capital.
Imagine two pools, one with concentrated liquidity 'V3' and another with a full range of liquidity 'V2'. Both pools facilitate the same volume of swaps and collect the same fees. In the CL pool 'V3', since there's less idle capital, the fees are distributed among a smaller amount of provided capital. This means that liquidity providers in the concentrated pool may receive a higher return even though the fees from each swap remain the same.
How should price ranges be selected?
Consider how much prices are likely to move during the lifetime of your position
Be willing to actively manage the position as the market changes
Take into account the economics of the transactions required to manage the position
If prices move outside your specified range, your position will be concentrated in one asset, and you won't earn trading fees until prices return to the range
Providing liquidity across the full range is an option, but it will result in a lower rate of return than a narrower range
Range presets
Full range Liquidity is provided across the entire price range of the asset being traded. This can be useful for assets that have a wide trading range or are subject to high volatility
Wide range Liquidity is concentrated in a wider price range. This can be useful for assets with moderate volatility, as it provides sufficient liquidity across a range of prices
Common range Liquidity is concentrated in both the buy and sell range around the current market price
Narrow range Liquidity is concentrated in a specific price range, usually close to the current market price. This can be useful for assets that have relatively stable prices, as it reduces the amount of capital required to provide liquidity while still maintaining efficient trading.
I am selecting presets in manual mode, but it doesn't indicate the APR for each preset. Why?
The app doesn't have that information - however, the average APR is displayed on the UI.
Is my position liquidated if the price exceeds my price range?
If the price of a trading pair goes beyond the range that you set for your LP, then your position will only consist of the less valuable asset in that pair.
For instance, if your price range for ETH/USDC is 555-1555, and ETH drops to 550, then your balance will only be in ETH. On the other hand, if ETH increases to 1560, then your balance will only be in USDC.
When the price remains outside of your specified range, your position will be in an out-of-range mode, which means that you will not earn any fees until the price returns to your set range
How APR for trading fees is calculated?
To calculate the APR for trading fees, we collect the total active TVL and fees made approximately every 10 minutes. We then determine the average active TVL for the past 7 days (or since the pool went live if it has been live for less than 7 days). Using the fees earned during this period, we calculate the APR
Can I create a custom token pair in v3?
Yes, you can create a custom token pair by providing liquidity to a new combination of tokens that do not have a V3 existing pool. To do so, you will need to select the tokens, set a price range, and deposit the required amounts of both tokens. Once the pool is created, others can also provide liquidity to that token pair.
How do I monitor and unbind my concentrated liquidity V3 positions?
You can monitor your concentrated liquidity V3 positions by navigating to the: Earn->Positions->LPV3. There, you can view your active positions, harvest the accrued fees, and the current status of your provided liquidity.
Can I withdraw my concentrated liquidity at any time?
Yes, you can withdraw your position at any time. To do this, go to the Earn->Positions->LP V3 page, select position, and look for the Unbind button.
How are fees earned and distributed in concentrated liquidity pools?
Fees are earned from swap transactions that occur within the specified price range set by the liquidity providers. These fees are automatically distributed proportionally to the liquidity providers based on the amount of liquidity they have contributed and the time they have been in the pool. For manual mode, pending rewards are harvestable on the V3 position management panel - when it comes to auto mode the LP fees auto-compounding in the LP.
Will v2 pools ever be discontinued?
We have no intention of discontinuing V2. Due to the technical complexities associated with concentrated liquidity, some users/protocols may opt for V2 over V3.
V2 and Exchange
Why am I unable to set the amount in the top box on the frontend exchange page?
This limitation arises due to the stable logic in place, which precludes calculations in the reverse direction.
What sets iNFT apart from simply providing liquidity?
While providing liquidity alone (LP only or Manual mode on V3) enables you to earn trading fees, creating an iNFT offers further advantages. An iNFT is essentially a staked position wrapped around LP, which has yield-bearing capabilities and provides access to several additional features. - Providing liquidity and creating a position are two different features - After you add liquidity, you have to wrap an LP token into a position to earn yield from incentivized farms.
How can I withdraw my liquidity?
The LP tokens will appear under the Positions tab.
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