V3, Liquidity, and Yield farming
How does V3 concentrated liquidity work?
Example of V3 concentrated liquidity mechanics:
For volatile pairs, Liquidity Providers (LPs) can optimize their strategies by concentrating liquidity within a specific, narrower price range where the asset typically trades. For example, a user can set their LP to cover $1.20 - $1.80 on an asset that regularly fluctuates between $1.00 - $2.00. This concentrated approach allows LPs to effectively allocate their liquidity within a range where actual trading activity may occur, avoiding the inefficiency of covering a broad range (e.g., $0.10 to $100) that goes beyond the asset's normal trading parameters.
For stable pairs, a liquidity provider may deploy their liquidity to a range of $0.995-$1.005. This can result in deeper liquidity for traders around the mid-price and increased trading fees for LPs using their capital.
What is the difference between using Auto mode and Manual mode on Hercules?
Manual mode (Advanced) lets liquidity providers set the specific price ranges for the liquidity they're providing.
Auto mode (Beginner/Intermediate) simplifies and automates liquidity management strategies for users by adjusting the price ranges for LPs.
Manual mode liquidity positions offer trading fees. on LP only and do NOT create an spNFT position.
Auto mode liquidity positions generate spNFTs which allow users to earn trading fees, farming rewards, and Nitro incentives simultaneously.
What improvements does the V3 concentrated liquidity model bring to traders and liquidity providers?
How does V3 enhance the protocol?
What are the main differences between V3 and V2?
V3 enables liquidity providers to allocate their liquidity more precisely in specified price ranges, substantially increasing capital utilization and efficiency.
The V3 model allows for more precise pricing and less slippage for traders, especially in volatile markets.
V3 liquidity range orders let traders specify the price ranges they wish to trade at and adjust positions as market conditions fluctuate, allowing them to trade more efficiently.
V3 allows for enhanced liquidity management by permitting the creation of custom ticks, allowing for finer control over liquidity positions.
V3 has lower gas fees and is overall more gas-efficient than V2.
Does Hercules charge higher fees for swaps that use concentrated liquidity, and if not, how can APRs be higher when using concentrated liquidity?
While the swap fees themselves don't typically vary with the distribution of liquidity. Liquidity Providers (LPs) do directly benefit by concentrating their liquidity in targeted price ranges. This strategy can lead to LPs earning a greater proportion of fees relative to their liquidity provisions.
How should price ranges be selected?
Consider how much prices may fluctuate during the lifetime of your position.
Be willing to actively manage your positions as the market changes.
Take into account the economics of the transactions required to manage the position
Understand that 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 within your selected range.
Providing liquidity across the full range is an option, but it will result in a lower rate of return than a narrower range. A narrower range equates to higher potential rates of return so long as the price fluctuations stay within the selected range.
Range presets
Full range - Liquidity is provided across the full price spectrum of the traded asset. A full-range spread can be ideal for assets that experience volatile price action.
Wide range - Liquidity is concentrated in a wider price range. This can be ideal for assets that experience moderate volatility, as it provides sufficient liquidity across a wider range of prices.
Common range - Liquidity is focused closely around the current market price on both the buy and sell sides.
Narrow range - Liquidity is concentrated in a much narrower price range close to the current market price. This is ideal for assets that experience stabler price movement as it reduces the amount of capital required for liquidity.
Is my position liquidated if the price exceeds my price range?
If the price of a trading pair exceeds the limits of the specified range set for your LP, your position will transform to only include the asset of lower value from that pair.
Example: If your set price range for ETH/USDC is 555-1555, and ETH drops to 550, then your balance will only be in ETH. In the opposite scenario, if ETH increases to 1560, then your balance will only be in USDC.
When the asset's price action veers outside of your selected ranges, your position will switch to an "out-of-range" mode, meaning you will not earn any fees until the asset's price action returns to your set range.
How are APRs for trading fees calculated?
Can I create a custom token pair in V3?
How do I monitor and unbind my concentrated liquidity V3 positions?
How are fees earned and distributed in concentrated liquidity pools?
Will V2 pools ever be discontinued?
What sets spNFTs apart from simply providing liquidity?
How can I withdraw my liquidity?
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