Breaking news - try concentrated liquidity on Liquidswap

Liquidswap becomes the first AMM on Aptos to offer concentrated liquidity for increased capital efficiency and APR. It’s been live on testnet for a while, and today we’re finally launching it on mainnet.

TL;DR

• With V1 pools, Liquidswap becomes the first to introduce concentrated liquidity on Aptos mainnet. It’s a powerful feature that increases capital efficiency and earnings for liquidity providers. Now you can make your money constantly work for you instead of lying idly in a pool.
• Three V1 pools are live so far: APT-lzUSDC, lzUSDT-lzUSDC, and doodoo-APT. You can already swap and add liquidity - but do read this guide until the end first!
• APR can be much higher in concentrated liquidity pools. However, the risk of impermanent loss is also higher - you’ve been warned!
• There is virtually no slippage thanks to the system of bins - mini-pools within the main pool. Once tokens in a bin are depleted, the contract moves to the next bin.
• Instead of LP tokens, you’ll get special NFTs. You can list and sell them on marketplaces.
• Swap fees are dynamic and depend on the volatility of each token pair. Pairs with large trading volume and lower volatility have higher fees.
• You don’t have to deposit equivalent amounts of two tokens: for example, you can add 70% of APT and 30% of USDC.
• Removing liquidity, you also have choices: redeem just one token or both, redeem from all bins or a part of the range, etc.
• Concentrated liquidity is suitable only for experienced liquidity providers. It’s not a “deposit-and-forget” type of product. If the price exits the range, you won’t earn any fees until you rebalance the range. Read this tutorial in full before you touch any V1 pool!
• Liquidswap V1 has been audited by OtterSec and Zellic.

What is concentrated liquidity?

Concentrated liquidity is a DEX feature that allows you to make your money work more efficiently and earn a higher APR. For a very detailed explanation, see our Concentrated Liquidity Guide.

Pontem is the first on Aptos to introduce concentrated liquidity with Liquidswap V1.0 pools. We call them V1 because they are the next step after V0.5, which offered lower slippage and lower fees but no possibility to choose a price range. Our CLMM uses the best practices from Trader Joe’s product on Avalanche, called Liquidity Book.

V1 pools allow you to deploy much less capital and still earn the same amount in fees as someone who deploys several times more liquidity in a V0.5 pool.

Even if you are not a liquidity provider, you’ll still benefit from V1 pools on Liquidswap. Concentrated liquidity pools tend to have deeper liquidity around the current price, which means lower slippage and price impact. You can expect even a large transaction to be executed at the expected price.

Liquidity bins, price range, and liquidity shapes

When you add liquidity to a V1 pool on Liquidswap, you’ll see unusual elements: bins and shapes.

A liquidity bin is like a mini-pool within a pool. For every price level (tick), there is one bin, and the price gap between two adjacent bins is called a step. On Liquidswap, there are different bin steps for different pools, with smaller values for less volatile pairs.

In the pool list and on the swap page, you’ll see bin steps displayed as X5 and X20. One step corresponds to 0.01%, so X5 stands for 0.05% and X20 for 0.2%.

Example: the bin step for APT-USDС on Liquidswap is X20, or 0.2%. If there is a bin corresponding to the APT price of 10 USDC, then the next bin’s price will be  10*1.002=10.02 USDC.

At any moment, only one bin can be active - the bin that corresponds to the current price. The tokens for the swaps are taken from this bin. Basically you add X tokens and take out Y tokens, or vice versa. Once you’ve depleted the supply of one type of token, the smart contract switches to the next bin, which becomes active.

All the bins except for the active one contain just one type of token (X or Y). They’ve either been depleted already or are waiting to be used. So for example, in the APT-USDC pool you’ll be able to add both APT and USDC to the active bin, but for any other bin, it will be only APT or only USDС.

Only the active bin earns trading fees, so you need to make sure that you have some capital deployed in the active bin. You can spread the funds across several bins to cover the price range where you expect the token pair to trade. If the price goes to a bin where you don’t have any tokens, you won’t earn any fees.

What is bin radius?

Bin radius is the number of liquidity bins on either side of your target price. In the Add Liquidity interface, the target price is set to the current market price by default, but you can change it.

Note: the APT-USDC pool displays the price in USDC for 1 APT. “0.100” means 0.1 APT for 1 USDC, which is equivalent to 10 USDC for 1 APT.

Important! If you set the radius to 20, the position will cover 20 bins on either side of the target price, so 40 bins in total. The total range of a position is always twice the radius (think of it as the radius and the diameter of a circle).

Example: the current price is 0.100 APT for 1 USDC and the bin step is X20. If you set the radius to 10, it will cover 2% of the price (10*0.2%) on either side of the current price, or from 0.098 APT to 0.102 APT for 1 USDC.

Fees on Liquidswap V1

Swapping fees on the CLMM are dynamic: they change depending on volatility. The fee is composed of:

1. base fee (determined by the parameters set at the moment of pool creation);
2. dynamic fee (this is the part that adjusts).

The total fee is capped, so no matter how high volatility gets, swappers won’t pay more than the maximum fee.

The point of this system is to protect CLMM liquidity providers. When volatility increases, there is a higher risk that the price will exit the range and the provider will stop earning fees. By increasing the fees during high volatility, we make sure that they at least earn more on each swap, so that the risk is partly compensated for.

For more on V1 fees, see Documentation.

LB tokens

Instead of fungible LP tokens, Liquidswap V1 uses special NFTs, called LBs (similar to Uniswap V3). Every V1 pool has an associated collection, and when someone adds liquidity to it, a new NFT is minted into the collection. For more info, see Documentation.

Using Liquidswap V1 CLMM

Adding liquidity

1. Connect Pontem Wallet or another Aptos wallet. Note that the concentrated liquidity engine has been thoroughly tested with Pontem Wallet.
2. Go to the LIquidswap Concentrated Liquidity portal and choose a V1 pool from the list in Earn -> Pools. Click on the “+” (Add Liquidity) icon.
3. In the Add Liquidity window, check that the correct tokens are selected: for example, APT and USDC. If a V1 pool doesn’t exist for the chosen pair, you’ll see a “Pool not created” message.
4. Enter the amounts you want to deposit: they don’t have to be 50/50. For example, you can add 10 APT and 50 USDC. The proportion you choose will define how the funds will be distributed across the chosen range.
5. Choose one of the four liquidity shapes: Spot, Curve, Bid-Ask, or Wide. See the Liquidity Shapes and Strategies section below for explanations. In general, the Spot and Wide shapes are recommended for beginners as they don’t require frequent rebalancing.
6. If you want, you can edit the price range or bin radius. Beginners are recommended to set a reasonably wide radius.
7. Once liquidity has been added, you’ll find the LB tokens in the NFT section of the wallet.

The default price range width is 11 bins.

Important notes

• The default price range width is 11 bins. This is quite narrow and can require frequent rebalancing.
• By default, both range and radius are centered around the current price, but you can change that (changing the Target Price in the Bin Radius tab or dragging the ends of the range in the Price range tabI.

For example, if you think that a pair will trend downward for a while, the current price can be closer to the upper limit of your range. Check the How to Choose a Price Range or Liquidity Bin Radius section below for more tips.

• If your chosen range doesn’t include the current price, you’ll be able to deposit only one type of token (e.g. either only APT or only USDC). That’s because all the bins except for the current one contain just one token. Click Reset Price to Default to return to the standard price and range size settings.

Redeeming liquidity

1. In Earn -> Pools -> My Pools, locate the V1 pool that you want to withdraw liquidity from. Click on the “-” (Remove Liquidity) icon.
2. Select which token you wish to redeem or stick with the default Remove Both setting. Unlike regular liquidity pools, V1 gives you a lot of flexibility: you can remove all the APT and leave USDC in the pool, for example.
3. Select the amount to be redeemed. For example, if you have 10 APT and 50 USDС staked and you choose 50%, you’ll remove 5 APT and 25 USDC, plus the accumulated liquidity provider rewards.
4. Make sure to drag and select the maximum available price range to remove all of the liquidity. If you want, however, you can remove liquidity from only one part of the range. For example, you can use it if you believe a token pair will trend upwards and won’t trade much in the bottom part of your original range. This feature can be very handy for rebalancing positions.
5. Click Redeem and confirm the transaction. LB NFTs will disappear from the wallet.

Notes

• If you choose to redeem just one token, it will be removed from all bins except for the active bin.
• If you use Remove Both, the tokens will be removed from all bins, including the active bin.

Liquidity shapes and strategies

When using liquidity bins on Liquidswap, you can choose one of the four options for the price curve shape: Spot, Wide, Bid-Ask, and Curve.

To rebalance or not to rebalance?

Every time you rebalance a position, you’ll need to spend a bit of time to check the price action and decide which range or bin radius is better. Besides, you’ll need to pay a gas fee.

On the other hand, Aptos has very low gas fees, so rebalancing will cost you around 100 times cheaper than on Ethereum. The main cost is your time.

The rule of thumb is that the narrower the range or bin radius, the more often you need to rebalance.

Example: let’s say the current price in the APT-USDC pair is 0.100  (10 USDC for 1 APT) and you’ve set the bin radius to 30 using the Spot strategy. The resulting range will go from 0.094 to 0.106 APT for 1 USDC, or around 9.43 to 10.64 USDC for 1 APT. But APT can move by more than that in a day, so you may need to check on it and potentially rebalance daily.

If you are just starting out with concentrated liquidity, consider setting a really wide bin radius (200 bins or more). It will still be more capital-efficient than a V0.5 pool, and you won’t have to rebalance as often.

How to choose a price range or liquidity bin radius

1) Don’t make the range too narrow for uncorrelated pairs. In V1 pools, you earn fees ONLY when the price is within your chosen range or bin radius. The narrower the range, the higher the risk that the price will fall out of it.

2) Do use a narrow range for correlated pairs. For pools like USDC-USDT, a range like 0.99-1.01 should be fine.

3) Study the volume and volatility. Analyze the price action and swap volume on your chosen currency pair for the past few weeks: were there moments when the price moved by 10% or more? Then try to simulate different swap scenarios – for example, how much will the price move if you swap $2,000 into the pool? Your range needs to be able to accommodate such price jumps.

4) Experiment with positions in both V0.5 and V1. For example, you can deposit half of the tokens in the APT-USDC V0.5 pool and half in the APT-USDC V1 pool. This way your liquidity will work for you both when it’s in and out of the range you set in V1. After a while, compare the earned fees and make a choice.

How much APR can you earn with V1 pools on Liquidswap?

V1 pools are brand-new, so we don’t have statistical data yet. On Uniswap, concentrated liquidity APR is between 16% and 166% higher than the APR in regular pools - even for passive positions (those that are not rebalanced). However, these numbers don’t take into account the increased risk of impermanent loss.

In any case, LP returns on a different AMM aren’t an indication of future returns on Liquidswap. Pontem doesn’t provide any guarantees concerning APRs, which constantly fluctuate based on trading volume and liquidity. You should always do your own research before joining a pool. Only deposit funds that you are prepared to lose.

Concentrated liquidity risks

Technical complexity

V1 pools are an advanced product for experienced DeFi users. If it’s your first time providing liquidity on a DEX, you should go with a V0 or a V0.5 Liquidswap pool with its simple UI.

If you do want to experiment with concentrated liquidity, keep in mind that:

1) You’ll need to choose the price range or bin radius carefully for each pool based on the recent price action. We’ll provide some tips later in this article, but you’ll have to do your own research (DYOR) anyway. If you set the range wrong, your APR will be lower than you expect – or even zero.

2) For maximum returns, price ranges and liquidity bins need to be rebalanced often – sometimes every couple of days if the market is choppy. Concentrated liquidity is NOT a passive income strategy.

Impermanent loss

Impermanent loss (IL) is a reduction in the value of a liquidity position compared to the hypothetical case where the user simply holds the same tokens in a wallet. It’s called impermanent, because if both tokens’  prices were to go back to where they were when you deposited the liquidity, IL would disappear.

Concentrated liquidity is associated with higher impermanent loss, especially for volatile pairs. That’s the price you pay for higher capital efficiency. We are looking into different ways to minimize the impact of IL, including variable swap fees. For now, make sure to rebalance the position in a timely manner to avoid IL.

Remember that even with the best position management, you can still experience impermanent loss. Pontem can’t provide any guarantees here.

We’ll really appreciate your feedback on V1 pools: it will help us make the Liquidswap concentrated liquidity product better. Please post your comments on Twitter, Telegram, or Discord.

About Pontem

Pontem Network is a product studio building foundational dApps for Aptos. Our products include:

• Pontem Wallet -- the best Aptos wallet
• Liquidswap -- the first DEX (AMM) for Aptos
• Move Playground -- a simple browser Move code editor
• Move IntelliJ IDE plugin for developers
• ByteBabel -- a Solidity-to-Move translator, and the first EVM for Aptos