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DeFi protocols have relied on the distribution of native tokens to incentivize liquidity providers (LPs). In a previous post, we delved into traditional liquidity incentives and the utilization of vote-escrow tokens. Now, we shift our focus to a fresh approach that has captured the attention of DeFi enthusiasts: concentrated liquidity methods.
High Utilization and Capital Efficiency: A Path to Higher Returns for LPs
In traditional liquidity pools, assets are often spread across a wide range of price levels, leading to underutilized capital. Concentrated liquidity has emerged to solve this issue by focusing liquidity within specified price ranges. This approach has several advantages that lead to higher returns for LPs:
Focused Liquidity: By concentrating liquidity within certain price ranges, LPs can ensure that their capital is used where it’s most needed. This focused approach makes every dollar of liquidity work harder, leading to more trading volume relative to the amount of capital provided.
Capital Efficiency: Traditional pools require more capital to achieve the same level of liquidity within a specific price range. With concentrated liquidity, LPs can provide the same depth with less capital, making their investment more efficient. This efficiency translates into higher returns, as LPs earn more fees per dollar invested.
Tailored Strategies: Concentrated liquidity allows LPs to customize their exposure based on their risk tolerance, market views, and investment strategies. New AMMs can allow users to tightly configure directional bets, order types.
Less Dilution of Fees: In traditional pools, fees are often diluted across a wide range of price levels. Concentrated liquidity enables LPs to earn fees specifically within their chosen price ranges, thereby reducing dilution and increasing returns.
Adaptation to Market Conditions: Concentrated liquidity protocols allow LPs to adjust their positions in response to market changes. This flexibility enables LPs to continuously optimize their positions, capturing more fees and enhancing returns. They are also becoming more gas efficient to allow traders to update orders more frequently.
A Shift from Token Emissions to Native Yield
The shift towards concentrated liquidity and away from high token emissions for LP incentives signifies a new chapter in DeFi’s incentive structure. The spending of protocol funds on tokens is becoming less prominent as projects look for more efficient and cost-effective ways to promote liquidity. Concentrated liquidity methods are enabling LPs to earn high native yield, bringing a new era of possibilities.
Let’s explore some of the most promising and intriguing concentrated liquidity methods out there:
Bunni: Incentivizing Concentrated Liquidity Ranges
By allowing projects to incentivize concentrated liquidity ranges on Uniswap v3, Bunni offers a new way for projects to boost liquidity.
- veToken Mechanism: Bunni introduces a special veToken mechanism where protocols can come with bribes to add LIT token emissions to their liquidity ranges. This mechanism makes it a suitable platform for different projects to boost their liquidity.
- High Fees in Concentrated Ranges: With higher fees in concentrated ranges, Bunni proves to be quite favorable for stablecoin protocols. The LPs can obtain high native yield, making it a lucrative option.
Maverick: Customized Liquidity Positions
Maverick (Mav) offers a concentrated liquidity DEX that allows users to create tailored liquidity positions based on ranges and directional orders.
- Capital Efficiency: Mav’s liquidity is highly capital efficient due to the concentrated aspect, which enables LP fees to be high on even small positions.
- Stablecoins and Staked ETH Derivatives: This efficiency has led some stablecoins and staked ETH derivatives to utilize Mav’s ranges for their LPs. Rather than adding high token incentives, the LPs are attracted by the high native fee yield on the position.
- Boosting Specific Position Types: Mav’s construction allows protocols to “boost” specific position types, further adding to the protocol’s appeal.
At Integral, we are anticipating the new needs of LPs and DEX traders alike. Already, Integral offers one of the most capital efficient venues for LPs, yielding high utilization multiples on a daily basis.
For traders, there is a low-cost venue to get the best fill on large orders.
We are looking forward to continuing to optimize our DEX with upcoming improvements to gas costs and additional order types for traders.
The next features will also involve ways for projects to take advantage of Integral SIZE’s capital efficient swaps to provide supporting liquidity for native tokens.
These methods offer a glimpse into the future of DeFi, where capital efficiency and returns become the main driver of where LPs decide to park capital.
Stay tuned to our blog, as we continue to explore these fascinating developments. Whether you’re an investor, a developer, or a casual observer, this new wave of incentives is something you won’t want to miss.