Providing Liquidity to Pools

Provide liquidity to facilitate DEX swaps and earn $PEARL

Providing Liquidity

Users provide liquidity to individual Pearl pools for traders to swap against. In return, users are eligible to receive trading fees (charged to traders for swaps) and $PEARL emissions. Emission rates to various pools are determined by Pearl gauges which are controlled by $vePEARL voters. More on voting in the following section.

Only liquidity provided in the active range will be eligible for rewards.

The following section provides an outline of the core principles to providing concentrated liquidity to pools on Pearl including the Pricing Spectrum (ticks and bands) and manually adding liquidity to pools. If you're a basic, non-expert user, consider jumping ahead to learn about Trident, our active liquidity manager.

Pricing Spectrum: Ticks and Bands

To implement concentrated liquidity, the previously continuous range of price levels has been segmented using ticks.

Ticks are the divisions between distinct segments in the price range.

The spacing of ticks is designed so that moving up or down by 1 tick equates to a 0.01% rise or fall in price at any given point within the price range.

Ticks serve as the demarcation lines for liquidity positions. When establishing a position, the provider is required to select the lower and upper tick that delineate the boundaries of their position.

We call this price-bound strip of liquidity a band.

As the current price moves as a result of swaps, the pool contract trades the outgoing asset for the incoming one, utilizing all the liquidity available within the present tick range until it reaches the next tick. Upon reaching this new tick, the contract transitions to another tick and engages any inactive liquidity in a position whose band encompasses the newly active tick.

Although each pool possesses an identical number of base ticks, in reality, only a subset of these ticks are functional as active ticks. Owing to the characteristics of Pearl smart contracts, the distance between ticks is intrinsically linked to the swap fee. Lower fee tiers permit a denser arrangement of potentially active ticks, whereas higher fees necessitate a broader spacing of these potential ticks.

Inactive ticks do not influence the cost of transactions during swaps. However, crossing an active tick does raise the expense of the transaction it is part of, as crossing a tick activates the liquidity in any new positions that use that tick as a boundary.

In scenarios where maximizing capital efficiency is crucial, like with stablecoin pairings, tighter tick spacing enhances the precision of liquidity provision and is expected to reduce price impact during swaps - resulting in notably better pricing for stablecoin exchanges.

Active Liquidity

Only the bands that encompass the current price range are active at a given time aka "active liquidity." This implies that swaps are being executed at a price within that band's range. As the token ratio in the pool shifts, the price moves accordingly, activating new bands and deactivating others.

Only active liquidity is eligible to earn rewards (fees and emissions.) Trident, Pearl's active liquidity manager is an excellent tool to help ensure provided liquidity tracks with the active range, optimizing rewards eligibility for users.

Adding Liquidity to Pools

Each pool is composed of two distinct tokens. Typically, a liquidity provider (LP) contributes both tokens in varying amounts, though sometimes they might offer just one token, known as “single-sided liquidity.” The proportion of these tokens is based on the LP's chosen distribution.

In a pool, an LP's liquidity is allocated within a band that matches a specific price interval, defined by two ticks. The pool's prices mirror the ratio of the two tokens within it. The width of the band is determined by the LP when they deploy to the pool. There can be an infinite number of bands within any liquidity pool, each band acting as it's own mini-pool for liquidity within that range.

From an LP perspective, any trading pair can have infinite bands i.e. mini pools of liquidity, deployed. Traders, on the other hand, don't select specific pools; they simply specify the amount they wish to swap, and the AMM smartly directs their swap to the liquidity bands that offer the best value at that moment. This may sometimes result in a higher fee for a more favorable price.

When a user deposits liquidity into a Pearl pool using the manual settings, they select from several options creating a unique, non-fungible position in that pool. Between the token pair, amount of each token provided and liquidity distribution, there are millions of liquidity combinations, making each user’s position is unique to that of other liquidity providers on Pearl. Consequently, liquidity positions created via the manual settings need a non-fungible record to capture this uniqueness and are thus represented via NFT in the LPs wallet. If the user decides to change their liquidity settings, the NFT is burned and new one is minted to reflect the updated liquidity parameters.

Once liquidity is provided, users will have the option to stake to receive emissions or leave unstaked to collect fees.

Pairing Requirements and Token Whitelisting

For dynamic incentives to work as designed, a rebasing, native yield product (like USTB or Baskets) must be integrated as one side of the token pair. To receive a gauge, any token being paired with a stablecoin will need to be paired with USTB.

New tokens also also need to be whitelisted. The team keeps a control over new tokens being listed in order to filter out scams and illegitimate projects. The team will whitelisted tokens and create the initial pair.

To request a custom gauge, please open a ticket on Discord.