In the true spirit of decentralization, the concentrated liquidity pools that enable TangleSwap users to swap their tokens are provided by other users, known as liquidity providers.
Liquidity providers play a crucial role in the TangleSwap ecosystem. By supplying liquidity, these users can maintain a strategic position in a chosen asset pair while putting their otherwise idle assets to work, earning swap fees proportional to their contribution to the pool.
In a departure from the limitations of traditional centralized exchanges, every user is now empowered to reap the benefits — and navigate the risks — of acting as a market maker to derive true yield & profitability.
TangleSwap's state-of-the-art liquidity pools (LPs) are designed around two core principles:
- Industry-grade security.
- Maximum capital efficiency (up to 4000x times higher!).
In line with these principles, TangleSwap has implemented a Concentrated Liquidity Market Maker (CLMM) algorithm. This innovative approach transcends the boundaries of traditional Automated Market Makers (AMM) by allowing liquidity providers to tie their positions to specific price ranges, thus enabling users to individually customize the terms of their liquidity provision.
Importantly, concentrated liquidity protocols yield significant benefits for all parties involved:
- Liquidity providers enjoy superior returns, and increased flexibility.
- Traders benefit from deeper effective liquidity, and remarkably lower slippage and fees.
Click here to explore some practical examples! 🤓
For the purpose of our examples, let's assume a user holds four tokens: $USDC, $USDT, $SMR, and $PEPE.
Example 1 — Narrow Range: best for stablecoin pairs 🏦
0.99 - 1.01range, the user's $100 USD would have the same impact and generate the same fees as $20,000 USD in a traditional (non-concentrated) AMM DEX. The difference is remarkable!
Furthermore, a user could take this strategy to the extreme and provide the most narrow possible liquidity around the $1 price point, by creating a liquidity pool with the minimum of 0.1% spread. For example, this maximally-narrow range could be established as
0.999 - 1, which would cause capital efficiency to soar 4,000 times higher than in a traditional AMM. To continue with our previous stablecoin example, the user's $100 USD would be equivalent to a staggering $400,000 USD in a conventional AMM. However, it is important to note that this strategy may not yield the desired results, as the user would be betting on the market price staying within a very narrow range, which may not be realistic even for a pair of stablecoins. Always DYOR before deploying capital!
Example 2 — Concentrated Range: best for most pairs 🌱
(-50%, +100%)from the current price, resulting in an actual range of
0.03 - 0.12. Note that since the position would be perfectly symmetrical around the present market price, the user would need to add USDC and SMR tokens in a 50% / 50% proportion (in terms of $ value). This strategy would allow for a great degree of capital efficiency while leaving ample room for price movement in either direction.
Alternatively, if the user would for example be bullish on SMR, they could choose an asymmetrical range such as
(-50%, +400%), resulting in an actual range of
0.03 - 0.30. In this case, since the user is creating an asymmetrical position that is 4 times wider in the increasing direction (+400%) than the decreasing one (-50%), then they would need to add USDC and SMR tokens in a 75% / 25% proportion (in $ value). When compared to the previous strategy, this approach would still provide a significant degree of capital efficiency while allowing for a much higher price increase.
When choosing a range for your liquidity position, it's important to note that the narrower the range, the more active management typically required to keep your position within the current market price and account for impermanent loss to optimize the yield on your assets. To help with this endeavour, TangleSwap implemented an original Oracle Balancer mechanism that significantly increases returns for liquidity providers in times of high market volatility.
Example 3 — Full Range (i.e. 0 to ∞, like in typical AMMs): best for volatile pairs, or passive LPs 💥
(0, ∞). Although this strategy yields considerably lower capital efficiency and profitability than an active concentrated liquidity position, it also allows the user to experience less impermanent loss as the price of the assets fluctuates — sometimes wildly — in either direction.
Full range positions are essentially a 'set and forget' strategy, making it an ideal choice for users who favor a hands-off approach without the need for active management or optimization. For example, a user could establish the LP and allow it to mature over an extended duration (e.g. 6 or 12 months), before returning to accrue the generated fees. Since the user selected the 'full range' spanning from zero to infinity, they will always be earning swap fees from that LP, irrespective of the price trajectory of the pool over time.
We strongly advise users to utilize the official TangleSwap Analytics as a research tool prior to committing any capital. This platform provides valuable insights into relevant market metrics, thereby enabling users to make informed, data-driven decisions.
The superior efficiency of concentrated liquidity is evidenced by the fact that leading DEXs by Volume and Total Value Locked (TVL) across all ecosystems are employing CLMM mechanisms, as seen in the analytics below.
While concentrated liquidity offers numerous advantages, some users may prefer the simplicity of keeping their current methods to provide liquidity. In consideration of this, TangleSwap implemented two interfaces:
PRO. The first version offers a user-friendly and familiar interface, while the latter grants access to the full set of features and capabilities of TangleSwap's CLMM technology.
CLMM: Understanding the Nuances
When you provide liquidity in a pool, the positive impact of your LP position depends not just on how much liquidity you put in, but also on how concentrated your liquidity is around the current price: the closer to the current price at any given time, the more impact it has in capital efficiency and profitability.
An illustrative example is shown below, comparing positions in the
(0, ∞) range with concentrated positions.
It's important to note that the composition of assets of a specific LP position is in a state of flux, adapting in response to price movements. As the price changes in a particular direction, the position accumulates more of one asset while concurrently facilitating swaps by supplying the other asset.
What distinguishes CLMM DEXs is the ability for users to define the price range within which their liquidity remains active; and the more concentrated a position is, the more rapidly its composition will change due to price fluctuations.
If the current market price moves outside the user-defined price range, the liquidity becomes effectively inactive, and the position stops earning swap fees. However, if the price re-enters the designated range, the liquidity reactivates, and the liquidity provider starts earning fees again.
Since every liquidity position is unique, TangleSwap LPs are represented in the blockchain as NFTs — not tokens! — that encapsulate all the information specified when the position was created.
Another important feature is the unique flexibility offered by concentrated liquidity positions. Liquidity providers can significantly increase their exposure to preferred assets (instead of being forced to a 50/50% ratio), and traders can even sell one asset for another by adding liquidity to a price range entirely above or below the market price. This flexibility is an important leverage that liquidity providers should always keep in mind.
To see it in practice, consider the scenario from the animation below, where the market price for a USDC/USDT stablecoin pair is $1, and the user selected a
(0.8, 1.2) price range. As the current price approaches the $0.8 lower limit, the position will contain more USDC and less USDT; and as the price increases towards the $1.2 upper threshold, the composition shifts towards a higher proportion of USDT. In the event that the market price crosses the $0.8 lower boundary, the position becomes inactive and is composed exclusively by USDC. Should the current price re-enter the user’s designated range, the position is reactivated; and if it surpasses the $1.2 higher boundary, the position becomes 100% USDT.
Understanding the CLMM mechanics is essential to maximize profitability and derive additional utility, such as finding the right fee tier, replicating financial options, and exploring advanced possibilities.
TangleSwap's liquidity pools (LPs) are equipped with an innovative feature known as the Oracle Balancer. This original algorithm is specifically designed to increase the profits in times of high volatility and mitigate impermanent loss for liquidity providers.
The Oracle Balancer operates by comparing the current prices of TangleSwap LPs with data sourced from trusted on-chain oracles. This comparison enables the Oracle Balancer to detect significant price deviations between the LPs and the oracle data.
In the event of such deviations, the Oracle Balancer springs into action, automatically adjusting the swap fee to intelligently compensate for the price discrepancy. This adjustment mechanism serves to boost LPs' revenue during periods of market volatility, effectively reducing the impact of impermanent loss.
Once an equilibrium is reached between the oracle and the pool prices, the Oracle Balancer deactivates, awaiting the next instance of significant price deviation to reactivate and perform its balancing function.
The schematic above provides a visual representation of the Oracle Balancer in action, illustrating its role in maintaining balance and ensuring optimal returns for liquidity providers.
TangleSwap's fee structure is designed with flexibility and optimization in mind. As users of the protocol, liquidity providers have exclusive authority to select either of three fee tiers for their LPs:
The total swap fees incurred by traders will thus vary between 0.05% and 1%, depending on the amount of liquidity available at each fee tier. TangleSwap's Orbit Router algorithm will optimize route selection to ensure the most favorable balance between swap fees and slippage. Consequently, a single swap may traverse multiple fee tiers and pools to secure the best possible outcome for the trader.
TangleSwap's fee discretization enables Night Fall NFT owners to receive a 10% discount on all trading fees. This feature just the beginning of a larger objective: enabling liquidity providers to differentiate between toxic and non-toxic flows and adjust fees accordingly.
As mentioned in the previous section, in certain scenarios and specific pools the swap fee may temporarily increase by 25% due to the activation of the Oracle Balancer mechanism.
Of the swap fees collected, 70% are directed to liquidity providers, while the remaining 30% is utilized to buy & burn $VOID directly from the markets, as detailed in our Buyback-and-Burn Blasters section.
It's important to note that fees earned by liquidity providers are not automatically reinvested in the pool. This gives users the freedom to collect fees at their convenience and decide how to use their accumulated revenue.
Interested in diving deeper into the mechanics of CLMM and how it differentiates from conventional AMMs? Check out our official blog: Explorer’s Manual: first steps into Concentrated Liquidity — the future of DeFi.
Keep in mind that being a liquidity provider in decentralized finance (DeFi) comes with both:
Potential benefits, such as:
- Earning passive yield from your assets, by accruing a portion of the generated swap fees.
- Increasing the global liquidity for both assets, making them more attractive for traders and investors.
- Gaining access to the TangleSwap Asteroid Farms, to accumulate additional rewards that can significantly increase the overall APR obtained from your LP positions.
Potential risks, like:
Selecting the Optimal Pool Fee
Different asset types typically tend to naturally gravitate towards specific fee tiers, depending on where incentives for swappers and liquidity providers align most closely.
For example, we can anticipate that low volatility assets, such as stablecoins, are likely to be predominantly found in the lowest fee tiers. Given the minimal price risk faced by liquidity providers holding these assets, swappers aim to achieve an execution price as close to 1:1 as possible.
Conversely, more exotic or infrequently traded assets are expected to trends towards the highest fee tiers. This is because liquidity providers aim to counterbalance the higher risks associated with holding these assets in their position.
Below we provide a broad overview of the three possible fee tiers. Please note that these fees will be determined by all users and liquidity providers based on ever-changing market conditions:
0.05%fee tier: optimal for token pairs that typically trade at a highly correlated rate, such as stablecoin pairs like USDT/USDC. Liquidity providers face minimal risk in these pools, and traders expect small fees.
0.3%fee tier: suggested as the default option, it is well-suited for less correlated token pairs such as ADA/USDC. This fee tier is designed to adequately compensate liquidity providers while still allowing for a satisfactory trading experience.
1%Fee Tier: designed for exotic pairs where liquidity providers face significant risk, such as PEPE/USDC.
By providing a flexible and user-centric fee structure, TangleSwap ensures that both liquidity providers and traders can optimize their strategies according to their risk tolerance and market conditions.
TangleSwap Analytics (Pools & Tokens)
To learn more insights about the current state of the markets, we highly recommend visiting the official TangleSwap Analytics, a powerful tool which provides a wealth of information about the TangleSwap ecosystem.
How To: Provide Liquidity
To fully utilize your assets with concentrated liquidity, make sure you have the PRO mode toggle enabled!