V3, Liquidity, and Yield farming
How does V3 concentrated liquidity work?
V3 Concentrated liquidity allows liquidity providers (LPs) to concentrate liquidity in a narrower price range where trades are more likely to occur instead of distributing them evenly across the entire price range as seen with the older automated market maker (AMM) model. Concentrating liquidity in a narrower price band can result in a more efficient use of liquidity and provide more favorable trades for users.
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?
The V3 concentrated liquidity model removes the inefficiencies of idle capital seen in V2 models. This leads to greater capital efficiency and a more favorable marketplace experience across the board.
Traders: Gain the capability to swap tokens at rates more closely aligned with the prevailing market prices, leading to enhanced trading efficiency and cost-effectiveness.
Liquidity Providers: Stand to increase their fee income by focusing their liquidity at the most demanded price points, thereby optimizing their returns on liquidity contributed.
How does V3 enhance the protocol?
Implementing V3 enhances the Hercules protocol in two key areas:
Attracting more liquidity providers: Higher APRs attract and incentivize additional liquidity providers.
Increased trading volume: Concentrated liquidity leads to better trades and enhanced capital efficiency boosting both user numbers and trading volume thus increasing fee revenue for the protocol.
What are the main differences between V3 and V2?
Unlike V2, V3 contrasts itself with the introduction of concentrated liquidity along with other key innovations such as directional & dynamic volatility fees, limit orders, custom tick spacing, and improved capital efficiency. These new features allow LPs to customize their positions and allow for higher returns from trading fees compared to the older V2 model.
V2 requires a 50/50 ratio between assets bundled into LP.
V3 allows for a custom range for LP.
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.
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.
Example:
Assume there are two pools with identical swap volume and fees - one pool implements the V3 concentrated liquidity model and the other implements the older V2 model. Since there's less idle capital by nature of the V3 pool, the fees are distributed among a smaller amount of provided capital. This means that liquidity providers in the V3 concentrated liquidity pool may receive a higher return even though the fees from each swap remain the same.
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?
To calculate the APR for trading fees, we first collect data on both the total value locked (TVL) and the fees collected approximately every 10 minutes. Then, we figure out the average TVL for the last 7 days, or for the pool's lifetime in the case it's been active for less than 7 days. Finally, we use these fees and the average TVL to calculate the APRs.
Can I create a custom token pair in V3?
Yes! You can create a custom token pair by providing liquidity to a token pair that does not yet have an existing V3 pool. To do this, you will need to select the desired tokens, set a price range, and deposit the required amounts of both tokens into the pool. Once the pool has been created, others can also contribute liquidity to that pool and facilitate trading activity.
How do I monitor and unbind my concentrated liquidity V3 positions?
You can both monitor and unbind your liquidity V3 positions by clicking the "earn" drop-down tab at the top of the page, and selecting "positions". This will take you to the "your positions" page where you can harvest fees, view, create, and manage new and existing positions.
How are fees earned and distributed in concentrated liquidity pools?
Fees are earned from trades that occur within the specified price range set by the liquidity providers. All earned fees are distributed proportionally to the liquidity providers based on the amount of liquidity they have contributed and the timeframe they've spent in the pool. For those who've selected auto mode, the LP fees are auto-compounded in the LP. For manual mode, users must navigate to the "your positions" panel and select the V3 section to harvest any rewards.
Will V2 pools ever be discontinued?
There are no current plans to discontinue V2. Some users may prefer the simpler model of V2 compared to the more complex model of V3.
What sets spNFTs apart from simply providing liquidity?
While providing liquidity alone (LP only or Manual mode on V3) enables you to earn trading fees, creating an spNFT offers a slew of other benefits! spNFTs exist as a staked position wrapped around an existing LP position. This spNFT is the secret weapon for earning on Hercules as it carries a plethora of additional yield-bearing capabilities and provides access to other exciting DeFi features.
Please note: Providing liquidity and creating a staked position are two separate actions. Users must create a staked position by "Wrapping" their LP token into a position to earn yield from incentivized farms.
How can I withdraw my liquidity?
You can withdraw your liquidity on the "your positions" page. Simply click the "earn" drop-down tab at the top of the page, and select "positions". This will take you to the "your positions" page where you can withdraw liquidity and manage your positions.
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