Dual Liquidity Vaults
Higher capital efficiency to Liquidity Provider
Last updated
Higher capital efficiency to Liquidity Provider
Last updated
The realm of Liquidity Providing (LP) in decentralized finance (DeFi) includes innovative new products. Notable examples in this space include:
Stryke
Smilee
Limitless
InfinityPools
Particle LAMM
These products leverage liquidity to offer derivatives like options and perpetual contracts. This allows liquidity providers to achieve higher capital efficiency. The following are general features of those protocols. Still, each product may have variations in its specifications, so it is recommended to refer to the specific product documentation for detailed information.
In traditional Automated Market Makers (AMMs), only the liquidity at the current price is used for swaps, generating swap fees. Liquidity above and below the current price remains idle until the price reaches those levels. By utilizing LPDfi protocols, liquidity providers can earn from liquidity that would otherwise be idle.
In LPDfi, liquidity is essentially loaned out to traders who use it to trade options or perpetual contracts. Here's how it works:
Liquidity providers receive fees upfront when they lend out their liquidity to traders. These fees are earned regardless of the outcome of the trades. Once the liquidity is lent out, it remains locked until the maturity date of the derivative. If there is not enough price movement during this period, the liquidity is unlocked and returned to the provider.
The option or perpetual contract is executed when there is enough price movement. The change in the liquidity position's asset amount mirrors what would occur if the liquidity had been used in a swap in an AMM, so the profit and loss (PnL) for liquidity providers in LPDfi reflects the same exposure to price movements as in an AMM. However, since LPDfi generates additional revenue from liquidity outside the current price range, providers can earn more efficiently than in traditional AMMs.
In other words, being utilized as a derivative in LPDfi is synonymous with being reserved for future swaps. As far as we currently observe, in most cases a higher rate than the swap fee is paid as a commission. In addition, there are many cases where price fluctuation is not sufficient (or the price moves in the opposite direction of the strike price) and execution does not take place, which results in more revenue for the LP.
Managing liquidity with LPDfi is significantly more complex compared to traditional AMMs. In AMMs, liquidity is managed within a single range. However, in LPDfi, liquidity must be allocated in precise units, such as ticks. When a provider wants to provide liquidity to the WETH-USDC 0.05% pool on Uniswap within a range of ±10%, they will manage two hundred liquidity positions. This is a trade-off for higher capital efficiency; positions have to be divided into smaller pieces to be easily handled on a derivative platform.
Orange employs smart contracts and off-chain bots to automate operations on LPDfi platforms. Here are some key features:
Orange manages liquidity at the tick level. During position updates, it loops through all tick liquidity amounts and their placements. When liquidity is utilized as a derivative, it cannot be withdrawn until the position is settled. Orange automates the handling of these inflexible positions. It burns and reallocates liquidity when it becomes free.
To prevent excessive gas fees when expanding ranges, Orange adjusts tick liquidity intervals. Still, it manages approximately 70~100 liquidity positions simultaneously.
Managing numerous liquidity positions and tracking their performance can be labor-intensive. Orange simplifies this by wrapping these positions into an ERC20 token, allowing for streamlined performance tracking as a Vault.
