Overview

The BitPool is a collection of noncustodial smart contracts that acts as a decentralized exchange offering both directional and bidirectional liquidity. By having directional support, LPs can properly express their views on a given pair and increase the liquidity available to the market at the same time.

Each type of position is placed within a liquidity pool and can be transacted via swaps. Having multiple LP types allows BitPool to function as a hybrid of an automated market maker (AMM) and a limit order book (LOB) at once.

The key difference between BitPool and limit order books is that LOBs have an order queue while BitPool merges all liquidity into a single pool, allowing for greater transaction throughput.

With the BitPool, AMMs have the addition of limit orders and stop-losses as a liquidity provider.

What Problem does BitPool Finance Address?

Indeterminate Pricing

Large institutions, in order to utilize a spot exchange for their day-to-day activities, need the capability to allocate a single asset to a position, enabling them to establish an unalterable price with irreversible execution. The existing decentralized exchanges (DEXes) primarily focus on options, perpetuals, or automated market makers (AMMs), and these models pose challenges such as the absence of spot trading, gas-related issues, or reversible execution. Consequently, the current DEXes available in the market fail to meet the requirements of numerous institutions looking to contribute assets to decentralized exchanges.

Merged buy and sell sides

Presently, the majority of fully on-chain Automated Market Makers (AMMs) only permit users to establish bidirectional positions on a specific pair, adhering to an invariant curve. This inherently reflects the market perspective that the tokens within the pair will maintain a relatively stable pricing against each other.

One of the features of the inherent design of an AMM from the viewpoint of a LP is when the price of an asset is changing relative to the other and the LP position is transacted with it changes to be comprised of more of the token that is decreasing in value. The reasoning for accepting this is due to transacting via swaps in either direction continuously the LP position accrues transaction fees from the users swapping in either direction with the liquidity pool.

The issue with AMM pools is, given the scenario above, the greater of a price change the less the user is receiving relative to what the value of the assets they initially deposited are worth. This is a type of opportunity cost called impermanent loss. The reason it may be impermanent is if the price shifts or reverts back to the price at which the LP created their position, this loss will be eliminated.

The price of the asset held in a position is determined by the demand for that asset relative to the other asset in a pair. Due to this if there is a lot of swapping into a certain asset in an AMM pool that asset will decrease in price.

BitPool addresses this by allowing LPs to choose from multiple types of positions to better reflect their beliefs on the market and manage their risk as they see fit.

Three Types of Positions

BitPool employs three types of positions:

• Limit positions

• Cover positions

• Range positions

Each of these positions is present in a different type of liquidity pool.

Limit Pools can be viewed as a range-bound limit order.

Cover Pools can be viewed as a range-bound stop loss which references the current TWAP.

Range Pools can be viewed as a standard range-bound AMM pool with ERC-1155 support and easy autocompounding.

Use cases for each can be observed on their respective pages.

Wrapping Up The Overview

The team is excited to see new use cases found for each of the types of positions and we welcome your suggestions.

With these added position types, liquidity providers can customize their risk profiles to match the current price action in the market.

Directional liquidity allows for one-way fills similar to a traditional limit order, whereas current LP positions are reversible.

DeFi protocols are often the largest liquidity providers in the ecosystem, so we're excited to see how our community and ecosystem can build solutions around protocols that are seeking to greatly improve their profitability and runway for the coming years.