Active Liquidity Management by Trident 🔱
Trident has been developed by the Pearl team to simplify the process and maximize rewards outcomes for users who are not interested in or capable of manually managing CL positions.
Concentrated liquidity pools have many benefits, as covered earlier in the docs.
However, CL also introduces new challenges.
Impermanent loss (IL) can be amplified if liquidity is left unmanaged in concentrated pools with high volatility.
Providing liquidity has now become a competitive endeavor as LPs compete to capture the as much trading volume as possible within their provided liquidity band, thus maximizing fee capture.
The simple act of providing liquidity has become substantially more complex and risky for the average DeFi user.
Trident by Pearl: Active Liquidity Manager
Active Liquidity Managers (ALMs) are programs created to help users navigate the many challenges of concentrated liquidity.
Trident by Pearl is our solution to the risks and complexities of providing concentrated liquidity.
Trident optimizes liquidity performance on Pearl, mitigating impermanent loss while seeking to maximize fee accrual using our proprietary strategy.
Strategy
Fees and impermanent loss are the respective forms of risk and rewards for concentrated liquidity. Liquidity providers generally seek to maximize fee production and minimize impermanent loss. However the truth is that both scale proportionally based on the concentration of the liquidity position. Trident's goal is to smooth out the returns profile, delivering more predictable returns with less work, through the implementation of a liquidity management strategy.
Trident is a fully-automated program that uses pre-set triggers to conduct management practices like rebalancing and setting ranges.
Think of Trident like a bot that takes your money and puts it into the pool. It's then constantly watching the market, executing a series of rebalances to keep the active trading range within the ALM's liquidity band.
Trident Token Details
Trident ALM is represented by ERC-20 tokens. Users depositing via Trident will hold the Trident ALM tokens in their wallet.
Users who stake their Trident tokens will earn emissions. Users who don't stake will earn fees. Regardless of the user's liquidity position (staked or not) Trident will execute the same strategy for all liquidity in that pool.
Trident has on- and off-chain components. The off-chain element calls an on-chain rebalancing function, but doesn’t have direct access to the assets in the pool. It can only specify a new range for the ALM to provide liquidity, and deploy unused tokens. Trident sits on top of the pool contract, not within the pool itself, keeping assets safe.
Like a standard Uni v2 LP, all liquidity is deposited proportionally into Trident. And like a standard liquidity pool, there is a fair value for the ALM at any time, the total price for all the Trident ALM tokens.
Basic Functionality
There are three key inputs to Trident's functionality. It's important to note that Trident cannot trade, it can only rebalance.
Trident's goal is always to rebalance based on legitimate moves in price and at periods of consolidation. Rebalances should not be the result of manipulation, temporary moves or process in the middle of a price run or correction. To the best of the ALM's ability, it's looking for a price confirmation before a rebalance.
While there's currently only one ALM which uses the same overarching logic, each individual pool has its own parameter configuration. Any time a new pool is added, the config file is updated to guide the ALM's actions for that specific set of assets.
The inputs below are the parameters we define per pool.
Numerical details shared below are directional and for example only. For security purposes we will not publish the exact ranges, thresholds and moving averages for any pool. These details will remain customizable and the team will continue to optimize over time to achieve the best results for liquidity providers.
Deposits Within a Range
Liquidity is provided within a range that is suitable for the volatility of the token, balancing the goals of maximizing returns for provided liquidity with the downsides of impermanent loss and trading out of range.
Example: The range could be set at 50% up, 50% down, i.e. if the price of asset A is $100, the range is $67 to $150.
Concentrated liquidity pools work on an exponential scale. All prices are price = 1.0001^tick. For symmetric liquidity, you need same number of ticks both above and below. If current price is $100, and your range is 50%, that's $100 * (1 + 50%)^1 and $100 * (1 + 50%)^-1 = $66.70.
If the pool is out of balance, the ALM will request a deposit at the same token ratio currently in the pool, in order to add to that. This helps control for unused tokens in the ALM that are not deployed to the pool, sending 100% of all new deposits into the pool. Withdrawals are then used to distributed undeployed capital back to users in addition to a percentage of pool tokens, helping to balance the ALM assets.
Rebalance Threshold
Threshold is defined to were the ALM will rebalance if the tokens make a fixed percentage price move that's confirmed with consolidation at the new price
Example: A 5% threshold means that once a 5% move in either is confirmed via consolidation, a rebalance is triggered.
The effect of the rebalance is to realize some of the impermanent loss, but limit future compounding of IL.
If price of asset A has moved from $100 to $105, you've lost some of an asset (sold it.) Trident will rebalance based on what's left in the pool, redeploying a new symmetric liquidity position. Continuing with the same example, the new range in this case would be $70 to $157.
Trident will only deploy enough of asset B to create a symmetric liquidity position. Remnants of asset B will be held on-chain by the ALM and used for future rebalancing. We expect this inefficiency due to diminish over time as users continue to deposit/withdraw as new deposits are required in the correct new ratio and unused tokens get removed with every withdrawal.
The rebalance threshold is an absolute, but configured by pool and based on the volatility of the assets. Consider the following as representative to how the threshold may vary between different asset types.
| Pair Type | Rebalance Threshold % |
|---|---|
Stable Pairs | 0.2% |
Sem-Stable Pairs | 5.0% |
Volatile Pairs | 7.5% |
Moving Average
Trident is designed to prevent manipulation. Market actors could force up the price of an asset, knowing the ALM will rebalance and then dump into that transaction. ALM design should prevent rebalancing against temporary, spurious moves.
To avoid that behavior, Trident calculates a moving average, snapping the price at consistent intervals and tracking a moving average over a period of time. For the rebalance to trigger, the live price must cross the moving average in the opposite direction as a sign of consolidation while also being above the rebalance threshold of the range.
Example: To rebalance at a higher price, the price has to be lower than the moving average because at that point consolidation has happened while also above the 5% rebalance threshold we've defined above.
Using a moving average helps the ALM confirm the move is real and it's not simply chasing volatility.
The time captured in the moving average is configurable by pool. Volatile pairs may benefit from a tighter range in the moving average i.e. 8 hours while semi-stable and stable pairs benefit from a longer average i.e. 48 hours.
Fees
Trident charges a 10% management fee deducted from the rewards earned on the assets under management of the ALM:
10% of trading fees accruing to the LP (staked or unstaked positions)
10% of emissions if the LP stakes their position
100% of Trident fees are returned to veRWA holders.
The first two fees are charged to the liquidity providers themselves, who deposit liquidity through Trident, and are deducted directly from the marketed rewards (fees or emissions yield) they earn for providing liquidity on Pearl.
Consistent with Pearl's rewards design, the fees on staked LPs accrue to vePEARL holders, as the liquidity providers opted for emissions over fees. In this case, Trident still claims of the 10% fees that would have accrued to vePEARL as compensation for the ALMs role in building liquidity and trading on Pearl, a benefit to vePEARL holders.
Rebalance Snapshots
Rebalance decisions are made at random timestamps over the course of an hour and the decision to rebalance may change based on the current price relative to the moving average and the range.
Example: Assuming the price is going up, at 17 min into the hour the current price may be 5% higher than the last rebalance and lower than moving average, triggering a rebalance. However, at 42 min into the hour, the current price may have again moved higher than the moving average, so while still above a 5% move, the rebalance wouldn't trigger until the snapshot sees the current price is below the moving average.
Security
Trident is designed to resist sandwich-style manipulations and attacks and mask strategic intent by simply watching the mempool.
Trident’s permissions are limited, it cannot trade, only rebalance. It’s designed in a manner where liquidity pool assets are not directly accessible by the ALM.
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