Range Pools
Last updated
Last updated
Range Pools are similar to what users have come to expect from AMMs while bounding liquidity between a price range.
LPs can provide their liquidity to a specific price range, resulting in a higher concentration of liquidity and less slippage for swappers in comparison to AMM without price bounds. This is due to being able to have more liquidity within a specific range by not providing the Full Range of a constant product curve.
The opportunity cost of providing liquidity to a constant function curve is commonly known as impermanent loss. Impermanent loss is intended to be hedged with the use of Cover Pools
Range Pools here have one unique feature improving composability with other DeFi protocols: Default Ranges.
Range Pools contain many small constant function curves between each price point, commonly referred to as a Tick.
Each of the smaller price ranges will have reserves based on liquidity active within that Tick.
Within each Tick, the pool functions exactly the same as what users have come to know from Constant Function Market Makers.
Mechanism to understand:
A position can also be bound to a Full Range which means that the position is bound from price 0 to ∞ so the price will always be within range for collecting fees,
The variables that change with the width of your liquidity range are the depth of your liquidity, effects of impermanent loss and
The volatile category applies to most pairs where a project pairs ETH or a stablecoin against their native token.
Provided the liquidity is range-bound, the magnitude of impermanent loss will be greater. For a range-bound position on a low volume pair, it’s very unlikely that the gains from trading fees will exceed the loss from impermanent loss.
Further, range-bounding liquidity on a volatile pair runs the risk of your position falling out of range. If your position falls out of range, you’ll need to rebalance. Rebalancing costs you in swap fees, slippage and gas.
To cover the costs of rebalancing one's liquidity position, we recommend a Cover position to cover impermanent loss with directional liquidity profits.
Pegged pairs, though not completely eliminating the risk of impermanent loss, often result in minimal IL. For lower volume pairs, LPs might want to increase the range slightly on each side.
Anchored in this context describes asset pairs that move predictably and steadily in price relative to one another.
WETH and rETH from Rocket Pool is a great example here. If rETH returns 10% annually relative to WETH, we could deploy a liquidity mining program on a narrow, concentrated range of liquidity, adding 10% to the upside as a buffer. This position would likely remain in range for a full year maintaining a high degree of capital efficiency — without any rebalance required.
Depending on the current price of the pool, the user will be able to withdraw their position accordingly:
price < user's lower tick: 100% of user liquidity will be in token0
price > user's upper tick: 100% of user liquidity will be in token1
price > user's lower tick AND price < user's upper tick: a mix of the user's liquidity will be both in token0 and token1
The way in which Range Pools track how much of the user's position has been filled is by using the value feeGrowthGlobal. Depending on where the current tick is will determine what liquidity is withdrawn from the pool.
Fee accounting is tracked with the feeGrowthGlobal0 and feeGrowthGlobal1 values present on the upper and lower tick representing the user's Position. Global fees generated represent 1 unit of liquidity, so to get the fees belonging to a single Position, we will multiply by that Position's liquidity amount.
Fees accumulated outside of a price range are tracked when a tick is crossed. This allows us to simply calculate fees accumulated below the lower tick and then fees calculated above the upper tick.
feeGrowthGlobal0 and feeGrowthGlobal1 are on a per liquidity unit basis, so this value is simply multiplied by the amount of liquidity contained in a Position to determine the fees owed to that specific Position.
