Liquidity Fusion in the iFi DEX
Althea L1 iFi DEX combines three different types of liquidity models into a single liquidity pool, making it much more efficient and flexible compared to traditional DEXs that usually would require multiple separate pools or a swap aggregator to deliver the same swap quality. We call this synthesis of liquidity types and functionality Liquidity Fusion.
Three Types of Liquidity
- Ambient Liquidity (Uniswap V2 Style)
What is it? This is the "always available" liquidity that spreads across the entire spectrum of possible prices.
Advantages: Trades can happen regardless of the price the pool is at
Disadvantages: Liquidity providers are more exposed to impermanent loss. Traders can experience inefficient swaps unless pools are large.
- Concentrated Liquidity (Uniswap V3 Style)
What is it? Rather than spreading liquidity across the entire spectrum of potential exchange rates, liquidity providers select a specific price range where they want their liquidity to be active. Providers can also overlap multiple liquidity positions, allowing for a more nuanced approach when deploying liquidity.
Advantages: This makes the provided liquidity more efficient. It’s only used for swaps in the desired price range. Traders experience very efficient swaps and liquidity providers have more control over their exposure.
Disadvantages: If the price moves outside of the range, the liquidity becomes inactive and swaps can not execute (unless/until the price returns within the specified range). Concentrated Liquidity is also more complicated to manage for liquidity providers.
- Knockout Liquidity (Limit Orders as Liquidity, Ambient / Ambient derivatives)
What is it? Knockout liquidity is a concentrated liquidity position with a very narrow price range that starts as entirely one token, and is removed from the pool when it becomes entirely made up of the other token. What this means is that it acts as both a liquidity position and as a limit order. For example, if someone wants to swap a large amount of a token at a set price, they can create a knockout liquidity position. This enables buyers to execute potentially enormous trades without slippage as long as there is sufficient knockout liquidity to cover the trade. Knockout liquidity will continue to be used as pool liquidity as long as the price stays within the defined range (think fractions of a cent price change). Once the price of the pool moves through the full range of the knockout position, the liquidity is automatically removed.. This allows the creator of the position to come by and withdraw their swapped tokens, in addition to any fees they may have earned for providing liquidity while the knockout liquidity position was active. If the price fails to move through the full range of the knockout position, it is also possible to withdraw early and get a mix of tokens and fees, much like how concentrated burns work.
Advantages: Knockout liquidity allows buyers and sellers to make large trades hyper-efficiently, and also provides improved swap quality to regular traders at the same time.
Disadvantages: Knockout liquidity is not an instant swap, it requires buyers or sellers willing to move the price from one side of the range limit to the other.
Liquidity Fusion: Ambient, Concentrated and Knockout Liquidity work together
Every pool in the iFi DEX uses liquidity fusion, applying the optimal mix of the three liquidity types to execute every swap.
- If the trade is within range of a knockout liquidity position, it will be used first reducing the price impact to effectively zero.
- If there is no knockout liquidity available iFi DEX will utilize concentrated liquidity provided that the price is within the range of the available concentrated liquidity.
- If the price moves outside the concentrated liquidity range, iFi DEX can still execute the trade using the ambient liquidity in the pool, even if it’s less efficient.
Liquidity Fusion provides an experience for swappers that is equal to or better than even the best DEX aggregators. DEX aggregators direct your swap across multiple pools and multiple DEXs in order to generate the best price. Liquidity Fusion can do that all in a single pool, faster, requiring less gas, and also provides knockout liquidity.
Limit order functionality in other DEXs (e.g. Uniswap) is limited to signing a normal swap that will execute at a later time. Knockout liquidity allows the user to trade time for efficiency that DEXs ordinarily cannot provide.
Ambient liquidity rewards
The iFi DEX is an Ambient DEX fork, with a new and completely unique feature only in the iFi DEX fork is integrated liquidity rewards. Ambient or Uniswap v2 style liquidity has two major advantages. It’s simple for liquidity providers to manage, and it’s fungible which makes liquidity rewards much easier to provide. With a concentrated liquidity position, every position is unique and is making a unique amount of swap fees based on the exact price range that was selected. Furthermore optimal utilization of the liquidity requires the price range of the liquidity providers position to be adjusted frequently. This can be a very active operation requiring weekly or even daily attention.
Ambient style liquidity on the other hand is a set it and forget it operation. Everyone providing ambient liquidity to a pool will have the same outcome, and receive the same amount of fees per unit of liquidity. Some protocols and communities continue to use ambient style liquidity exclusively despite its reduced efficiency because participation is so much easier.
With Liquidity Fusion in each iFi DEX pool there would normally not be many good reasons to use ambient liquidity. The more efficient concentrated liquidity positions would earn the vast majority of the fees and discourage less specialized and infrequently active liquidity providers from being involved at all. This is a problem, because ambient liquidity can act as a strategic reserve for trading when a large price swing reduces active concentrated and knockout liquidity.Using the iFi DEX incentives program, governance or any other sponsor can provide rewards to be distributed to all ambient liquidity participants in a pool, encouraging liquidity providers to participate and allowing traders to take full advantage of all types of liquidity.
A focused DEX
Althea L1 is a platform focused on providing an efficient, effective, and easy infrastructure platform. To fit into that mold the iFi DEX is designed as a one stop shop that replaces an entire ecosystem of liquidity pools and DEX aggregation. With the iFi DEX applications on Althea L1 can focus on building effective and reliable infrastructure for their customers.