Introduction
An introduction to Orphic Finance and concentrated liquidity
Last updated
An introduction to Orphic Finance and concentrated liquidity
Last updated
A Brief History of Liquidity
For most of the history of cryptocurrencies, assets were only tradable through a centralized broker or directly peer-to-peer. Decentralized exchanges emerged in the late 2010s but were inefficient, centralized, and had poor liquidity.
In late 2018, Uniswap V1, the first true Automated Market Maker(AMM), premiered.
Uniswap introduced decentralized liquidity pools. "Liquidity providers" or "LPs", could deposit their assets into two-sided liquidity pools to provide liquidity for ERC-20/ETH pairs and earn trading fees. This process was later expanded to ERC-20/ERC-20 pairs on Uniswap V2. Uniswap's architecture kept swaps fast and efficient for traders.
Since then Uniswap's AMM model has become the dominant decentralized exchange model. Numerous forks and variations of Uniswap V2 have also emerged since then.
Another process that emerged was protocols incentivizing liquidity providers with rewards to increase liquidity in pools. This is known by many names, including yield farming, liquidity mining, or mercenary capital. Liquidity mining was extremely profitable and helped grow DeFi exponentially in 2020.
However, a long-term problem emerged during this growth period. Uniswap was not as efficient as it could be. It lacked capital efficiency. Liquidity could only be provided full-range, meaning that liquidity providers (LPs) had to provide liquidity far outside the ranges of the current price of the assets. All LPs chose the same position. The only variable was how much they put in.
A solution to the full-range problem came in March 2021. Uniswap released Uniswap V3. One of the many new features was concentrated liquidity. Uniswap V3 allowed users to choose the range (via ticks) at which they wanted to provide liquidity.
This relatively simple change had dramatic effects on the market. Liquidity pools became much more efficient. Fees could only be earned by those who provided liquidity within the proper ranges. Although LPs could still offer full-range positions, they became less competitive. The liquidity concentration and range began to adjust in real-time to match the needed liquidity for any pool. A dynamic new market emerged in the world of liquidity.
Uniswap V3's BUSL License expired on April 1st, 2023. After it expired, established Uniswap V2 forks like PancakeSwap and SushiSwap immediately adopted concentrated liquidity
Other non-fork exchanges like Balancer and Kyberswap also embraced concentrated liquidity approaches.
Although there were doubts about the profitability and sustainability of concentrated liquidity, Decentralized Exchange Aggregators proved decisive in routing trades to them. Concentrated liquidity now dominates the decentralized trading space.
Concentrated liquidity was a huge change for the liquidity provider, and not all of the changes were positive.
Concentrated liquidity pools introduced a new risk to LPs providing liquidity called impermanent loss. Mitigating impermanent loss is challenging, and providing liquidity became significantly more complex and risky for the average user.
Analytics, or understanding the performance and profitability of LP positions, were nearly non-existent when concentrated liquidity was deployed. Nor were there standardized measurements for things like impermanent loss.
Incentives, famously declared dead by a slew of DeFi thinkers, didn't die, but became a more complex and calculated endeavor. Farmers could be rewarded for more than how much funding they put in but also for how they provided funds.
Another issue that popped up was protocols being able to manage their own liquidity pools and their treasuries. If a protocol were to deploy on Uniswap V3 and not manage the liquidity correctly, it could prove disastrous for their health.
There was immediately a need to solve these issues.
Concentrated Liquidity Managers (CLMs) or Concentrated Liquidity Market Makers (CLMMs) are protocols that are designed to deal with the new challenges of concentrated liquidity.
Different liquidity managers have different priorities. Some focus on one aspect of concentrated liquidity. Some do it all.
Orphic Finance was created to solve all of the challenges of concentrated liquidity.
Orphic Finance provide LPs with the most optimized performance on a variety of supported platforms and blockchains. Orphic does this by mitigating impermanent loss and accumulating fees using proper strategies. That performance is viewable on our Analytics. Orphic also supports a variety of in-house and 3rd party platforms for protocols to reward incentives to liquidity providers. Finally, Orphic offers protocol liquidity and treasury management services to a variety of projects.
One of the most important yet misunderstood concepts in concentrated liquidity is its inherent competitiveness.
It's very important for liquidity providers and protocols to understand that they are now in a competitive space. Nobody, no matter how skilled at management, is always profitable.
Pools can be oversaturated with liquidity for the amount of volume, which leads to poor fee performance for the LPs, even in ideal conditions. High volatility can make even the best-managed pools take losses. A group of users who gets incentives have a huge advantage over those who don't have them. Full-range positions and sustained four-figure APRs are simply not going to happen much anymore.
With the development of Uniswap V4, Algebra V2, Balancer V2, and more, concentrated liquidity is here to stay. Orphic will continue to support compatible blockchains and exchanges and offer advanced strategies for retail LPs and professional organizations. Orphic will also continue to improve its analytics suite, and strategies
