Automated Liquidity Concentration
Last updated
Last updated
Automated Liquidity Concentration (ALC) is an algorithm designed to adjust the concentration level of each liquidity pool, enhancing capital efficiency while ensuring that neither side of the reserve is not depleted. Unlike traditional price range-based methods, where liquidity providers set a specific price range for their liquidity's position, ALC doesn't rely on a fixed range. In traditional methods, if the price moves outside the selected range, liquidity providers won’t earn trading fees and may end up holding depreciating assets, hoping the price will return to their chosen range.
The ALC approach is the method makes the liquidity allocation more efficient by focusing on the areas where the market is actively trading. Additionally, ALC simplifies liquidity provision by ensuring that all liquidity providers operate on the same slope. The algorithm automatically adjusts the slope or concentration level for each pool, removing the need for liquidity providers to manually manage their liquidity allocations.
Here is the principle behind ALC
DFAMM (Dynamic Flow Automated Market Maker) replaces the traditional x·y = k model with a price point–based system, enabling dynamic liquidity allocation and more efficient order execution. A key part of this system is Automated Liquidity Concentration (ALC), which enhances liquidity management as follows:
Granular Liquidity Tracking: Each bin (representing a 0.1% price step) maintains the percentage share of the total ERC20 liquidity (tokens X and Y).
Hierarchical Adaptation: ALC operates across the 8-group structure, where each group is formed from 8 consecutive bins. This grouping allows the protocol to manage liquidity more efficiently and reduce computational overhead.
Dynamic Adjustments: The liquidity shares are updated every 3 days. If 50% of the liquidity in a bin or group is traded, ALC responds by reducing the liquidity concentration by 50%, thereby maintaining an optimal distribution that reflects current market activity.
Price-Based Calculations: If the Current Max Price is equal to or less than the TWAP price by 0.2% or less, the Current Max Price will remain unchanged. The formula when determining the new Max Price:
ALC will activate if the trading volume over the past three days is at least 10% of the asset's Total Value Locked (TVL). This condition may be adjusted based on market conditions. (with Max CL -> 6.4%, Min CL 51.2%)
For example, in an ETH-USDC pool, the algorithm would first calculate the average price of ETH/USDC. It would then reduce the liquidity by 50% and redistribute the remaining liquidity between the square and the square root of that average price. After completing the first adjustment, the algorithm repeats this process at regular intervals, gradually refining liquidity allocation as market conditions evolve.
