Concentrated Liquidity

Introduction

Concentrated Liquidity

VAELOB represents an innovation beyond Uniswap v3, taking a significant step forward in enhancing capital efficiency. Similar to Uniswap v3, it supports a concentrated liquidity provision strategy within AMM pools, enabling LPs to choose any consecutive intervals for their liquidity contributions. This strategy of concentrating liquidity within targeted price ranges has been successful in notably improving market depth. Such an approach is expected to enhance the user experience for order book traders on Vessel, consequently leading to a substantial increase in both fees and spread rewards for liquidity providers.

Example: Add Liquidity

New Position in Liquidity Pool

To better understand how Vessel enables concentrated liquidity provision, let's go through a practical example.

Assume we have an ETH/USDT liquidity pool with a tick spacing of $1, and the current interval lies at [$3800, $3801]. This means the pool manages its liquidity by placing buy orders below $3800 and sell orders above $3801.

Suppose Bob wants to add liquidity to this pool. He intends to create a position with $Tick_L=3500$, $Tick_R=4100$, $L=0.01$, meaning he wants to add 0.01 ETH liquidity to each interval within the range [$3500, $4100]. To determine the assets needed for this position, we perform the following calculations:

1. For intervals below $3800: USDT is needed to place buy orders, totaling:

$$l1=\sum_{i=3500}^{3799} (i \times 0.01) = 10948.5 \text{ USDT}$$

2. For intervals above $3800: ETH is needed to place sell orders, totaling:

$$l2=(4100-3801)\times 0.01=2.99 \text{ ETH}$$

3. For the current interval [$3800, $3801]: Both USDT and ETH are required to provide liquidity proportionally to the current left-side and right-side order sizes:

$$l3_{left}=3800\times 0.01 \times \frac{2}{5}= 14.2 \text{ USDT}$$

$$l3_{right}=0.01 \times \frac{3}{5}=0.006 \text{ ETH}$$

Summing these values gives the total assets required for Bob's position:

$$total=(l1+l3_{left}) \text{ ETH} + (l2+l3_{right}) \text{ USDT} = 2.996 \text{ ETH} + 10962.7 \text{ USDT}$$