Liquidity and Yield farming

V3

How does V3 manual mode function?

V3 Concentrated liquidity on DonutSwap enables liquidity providers to allocate their tokens within selected price ranges rather than distributing them uniformly across the entire spectrum. This approach allows providers to focus their capital in areas where they anticipate higher trading volumes, offering more targeted liquidity while maintaining coverage over a wider range of prices, instead of spreading it across the full price range.

In other words, concentrated liquidity means that you can choose specific prices to provide liquidity for, rather than spreading it across the entire price range. It's akin to selecting only your preferred toys to share with friends, instead of offering them your entire toy collection.

Example of the mechanics

In a volatile asset pairing, a liquidity provider (LP) might choose to allocate liquidity within a specific price bracket, say $1.10 to $1.30. This strategy ensures that the liquidity is only deployed when the asset's price falls within this range, enabling a more focused approach to liquidity provisioning. In a stable asset pairing, a liquidity provider might choose to commit their funds exclusively within the $0.995 to $1.005 range. Such a strategy could enhance liquidity near the average price point, potentially enabling the liquidity provider to generate higher trading fees from their investment.

What is the difference between Auto mode and Manual mode?

• Manual mode, tailored for seasoned liquidity providers, empowers them with the ability to directly manage and set their liquidity's price ranges.

• Auto mode, operating through specialized non-fungible tokens, implements advanced liquidity management strategies, autonomously optimizing and adjusting the price ranges on behalf of the users.

When liquidity is on a manual mode, it results in positions that qualify solely as Liquidity Providers (LP), limited to earning only from trading fees.

Quite the opposite, providing liquidity on auto mode can create positions in form of staked position Non-Fungible Tokens (spNFTs), enabling the simultaneous earning of trading fees, farming emissions, and Nitro incentives.

What is Sprinkle and how does it work?

Sprinkle is a system designed to reward DonutSwap's Version 3 manual liquidity positions.

For users, this method is straightforward: if the trading pair associated with your position qualifies for market maker incentives, you'll earn extra rewards in addition to the usual trading fees. These additional earnings can be collected through the 'positions' section of the decentralized application's interface.

What benefits does V3 offer to traders and liquidity providers?

In V2, liquidity providers contribute two assets in equal proportions (50% each) to a liquidity pool. This pool serves as a medium for executing trades between the assets. However, this approach may lead to underutilized capital, as the liquidity provider's investment might not be fully employed at all times. Furthermore, the rigid 50:50 asset ratio can constrain trading options and potentially lead to increased trading fees.

In V3, both liquidity providers and traders experience enhanced benefits. For traders, the system facilitates more efficient trading by enabling token swaps at prices that are more aligned with the current market rates. This improvement helps in reducing the costs associated with slippage. On the other hand, liquidity providers benefit from the opportunity to earn increased fees. This is made possible by their provision of liquidity at precisely those price points where the demand is significantly higher. Consequently, V3 presents a more optimized and financially advantageous environment for both parties involved in the trading process.

How does V3 improve the protocol?

• Enhancing Liquidity Provider Incentives: V3 of the Contract Liquidity (CL) offers increased Annual Percentage Rates (APRs), making it more appealing for prospective liquidity providers (LPs) to participate.

• Boosting Platform Trade Volume: The implementation of CL results in narrower spreads and enhanced capital utilization, drawing a larger number of traders. This increased trader activity leads to a rise in trading volume, which translates to greater fee revenues for the protocol.

What are the main differences between V2 and V3?

Key distinctions between V2 and V3 include several innovative features:

1. Concentrated Liquidity: V3 introduces a novel approach allowing liquidity providers (LPs) to allocate funds in specific price ranges, increasing the effectiveness of their capital. This is a departure from V2's approach of evenly distributed liquidity.

2. Adaptive Volatility Fees: V3 incorporates volatility fees that vary with market conditions and trade direction, a functionality absent in V2. These dynamic fees can lead to potentially higher earnings for LPs in times of market volatility.

3. Limit Orders Capability: The ability to set limit orders is a new feature in V3, offering LPs the option to specify exact prices for their trades, unlike the more generalized trading approach in V2.

4. Support for Rebasing Tokens: V3 extends its functionality to include rebasing tokens, which are capable of automatically adjusting their supply, a feature not supported in V2.

5. Flexible Tick Spacing: In V3, LPs can set their own tick spacing, offering greater control over price intervals for trades. This feature enhances the flexibility not seen in V2.

6. Enhanced Capital Efficiency: V3 is designed for greater efficiency in capital usage, an improvement over V2's fixed 50/50 asset ratio model.

7. Improved User Interface: Significant enhancements in the user interface are a hallmark of V3, making it more user-friendly and interactive compared to V2's simpler design.

8. Customizable Asset Exposure: Unlike V2's rigid 50/50 asset ratio, V3 allows LPs to tailor their asset exposure within a chosen range, which can lead to increased trading fee earnings.

Overall, V3 is marked by its advanced features and flexibility, offering liquidity providers enhanced capital efficiency and the potential for greater returns, a significant evolution from the more basic framework of V2.

Does DonutSwap impose additional fees for swaps utilizing concentrated liquidity, and if not, what mechanisms contribute to a APR when employing concentrated liquidity?

The structure of swap fees might not vary with the concentration of liquidity; however, the advantages for liquidity providers (LPs) become evident in the context of concentrated liquidity. By strategically allocating capital within certain price ranges, LPs can potentially gain a larger portion of fees in proportion to their capital investment.

Consider two scenarios: one pool utilizing concentrated liquidity ('V3') and another offering a wide range of liquidity ('V2'), both handling identical swap volumes and accruing equal fees.

In the 'V3' pool, which employs concentrated liquidity, there is a reduction in non-utilized capital. As a result, the fees gathered are shared among a smaller pool of capital.

Consequently, LPs in the 'V3' pool might experience enhanced returns, despite the swap fees per transaction remaining constant. This is a distinct benefit over the 'V2' model, where liquidity is dispersed over a broader range, potentially diluting individual returns.

How should price ranges be selected?

• Reflect on the potential price fluctuations over the duration of your position.

• Prepare to dynamically adjust your position in response to market shifts.

• Factor in the financial implications of the transactions needed for managing your position.

• Be aware that if market prices drift beyond your chosen range, your investment will become more heavily weighted in one asset, and you will cease to receive trading fees until the market prices reenter your specified range.

• While offering liquidity over the entire price spectrum is possible, it typically yields a lesser return compared to opting for a more limited range.

Range presets

Complete Range

• Liquidity is offered throughout the entire spectrum of prices for the asset in question. This proves beneficial for assets characterized by either a broad trading span or heightened volatility.

Extensive Range

• Liquidity is predominantly spread over a broader range of prices. This is advantageous for assets displaying moderate volatility, as it ensures an ample liquidity pool encompassing various price levels.

Standard Range

• Liquidity is concentrated within the buying and selling range surrounding the prevailing market price.

Limited Range

• Liquidity is focused on a specific price range, typically in close proximity to the prevailing market price. This proves advantageous for assets with relatively stable prices, reducing the capital required for liquidity provision while maintaining efficient trading operations.

I am selecting presets in manual mode, but it doesn't indicate the APR for each preset. Why?

The app doesn't have that information - however, the average APR is displayed on the UI

Will my position be closed if the price surpasses my specified price range?

If the price of a trading pair exceeds the range you've defined for your liquidity provider (LP) position, your position will be comprised of the less valuable asset within that pair.

To illustrate, suppose your specified price range for ETH/USDC spans from 555 to 1555. If the price of ETH falls to 550, your entire balance will consist solely of ETH. Conversely, if the price of ETH rises to 1560, your balance will exclusively consist of USDC.

If the price stays beyond the range you've set, your position will enter an "out of range" mode, during which you won't accrue any fees until the price comes back within your specified range.

How APR for trading fees is calculated?

To determine the Annual Percentage Rate (APR) for trading fees, we regularly gather data on the total active TVL and fees generated approximately every 10 minutes. Subsequently, we ascertain the average active TVL over the past 7 days (or since the pool's launch if it has been operational for less than 7 days). Using the fees accrued during this specified timeframe, we proceed to compute the APR.

Can I create a custom token pair in v3?

Certainly, it's possible to establish a unique token pair by supplying liquidity to a novel token combination that lacks an existing pool in V3. To achieve this, you'll have to choose the tokens, define a price range, and deposit the necessary quantities of both tokens. After successfully creating the pool, other individuals can also contribute liquidity to that specific token pair.

How do I monitor and unbind my concentrated liquidity V3 positions?

To keep track of your concentrated liquidity V3 positions, simply go to the "Earn" section, then click on "Positions," and select "LPV3." Within this section, you'll be able to see your ongoing positions, collect the earned fees, and check the current status of your liquidity contributions.

Can I withdraw my concentrated liquidity at any time?

Yes, you have the option to withdraw your position at any moment. To do this, navigate to the Earn section, click on Positions, and then access the LP V3 page. Once there, simply choose the position you wish to withdraw from and locate the Unbind button.

How are fees earned and distributed in concentrated liquidity pools?

Fees are generated through swap transactions conducted within the predefined price range established by liquidity providers. These fees are then automatically allocated in proportion to the liquidity providers' contributions and the duration they have been part of the pool. In manual mode, pending rewards can be collected from the V3 position management panel. In contrast, in auto mode, LP fees are automatically reinvested and compounded within the LP.

Is there a possibility that V2 pools will be discontinued?

We want to clarify that we currently have no plans to discontinue V2. However, it's worth noting that due to the technical challenges linked to concentrated liquidity, certain users or protocols may choose to continue using V2 instead of transitioning to V3.

V2 and Exchange

Why am I unable to set the amount in the top box on the frontend exchange page?

This constraint arises from the established logic that prevents reverse calculations.

What distinguishes spNFTs from merely offering liquidity?

While supplying liquidity independently (either through LP only or Manual mode on V3) allows you to generate trading fees, crafting an spNFT comes with added benefits. An spNFT essentially represents a staked position intertwined with LP, boasting yield-generating potential and granting access to a host of supplementary features.

• Providing liquidity and establishing a position are distinct functionalities.

• Following the addition of liquidity, you must encase an LP token into a position to capitalize on yield opportunities offered by incentivized farms.

LP V2/V3 = Trading fees

spNFT = Trading fees, amplified farm incentives, and nitro rewards

How can I withdraw my liquidity?

The LP tokens will be visible within the Positions tab.

(If you have converted your LP tokens into a position, you need to withdraw your position before proceeding)