Concentrated Liquidity
A core feature of Intrinsic is the concept of concentrated liquidity, which involves allocating liquidity with a specific customized price range. Taken from UniswapV3 whereas in previous versions of UniswapV3, liquidity was evenly spread across the entire price curve, spanning from 0 to infinity.
A uniform distribution facilitates trading throughout the entire price from 0 to infinity without loss of liquidity. In many instances, this design left a majority of the liquidity underutilized. Take for example stablecoin pairs, liquidity beyond the usual price range of a stablecoin pair would be seldom utilized. For instance, in UniswapV2 the DAI/USDC pair, approximately 0.5% of the total available capital is employed for trading between $0.99 and $1.01, which represents the price range where liquidity providers (LPs) anticipate the highest trading volume and, consequently, earn the most fees.
In Intrinsic, liquidity providers have the option to concentrate their capital within narrower price intervals instead of the entire range of 0 to infinity. For instance, in a stablecoin/stablecoin pair, a liquidity provider can allocate their capital exclusively to the range of 0.99 - 1.01. This approach enhances the availability of deeper liquidity around the mid-price for traders while enabling liquidity providers to earn higher trading fees with their concentrated capital. Liquidity providers can have multiple concentrated capital allocations or positions per pool, allowing for individualized price curves that align with the preferences of each liquidity provider.
Active Liquidity
When the price of an asset increases or decreases, it has the potential to surpass the price boundaries established by liquidity providers (LPs) within a position. Once the price moves beyond the interval defined by a position, the liquidity allocated to that position becomes inactive, resulting in the cessation of fees earned for that particular position.
As the price moves in a particular direction, liquidity providers accumulate more of one asset as traders seek the other, eventually resulting in their entire liquidity being comprised of only one asset. If the price reenters the predefined interval, the liquidity becomes active once again, allowing in-range LPs to resume earning fees.
Liquidity providers have the freedom to establish multiple positions, each with its own unique price interval. By offering concentrated liquidity, the market itself determines the optimal distribution of liquidity, as LPs are incentivized to concentrate their liquidity while ensuring its ongoing activity. This approach empowers rational LPs to make informed decisions about the allocation of their liquidity. \
Price Ticks
Concentrated liquidity is achieved by partitioning prices in ticks.
Ticks serve as the demarcations between distinct regions in price space. These ticks are positioned so that a single tick movement, either upward or downward, corresponds to a 0.01% change in price across the entire price space.
Ticks define the limits of liquidity positions. When a position is established, the liquidity provider is required to specify the lower and upper tick values that will serve as the boundaries for their position.
As the spot price fluctuates while trading, the pool contract dynamically swaps the outbound asset for the inbound asset, gradually utilizing all the available liquidity within the current tick interval until it reaches the next tick. Once the next tick is reached, the contract transitions to a new tick and activates any dormant liquidity within a position that encompasses the newly active tick.
Every pool consists of the same quantity of underlying ticks, and only a subset of them can effectively function as active ticks in practice. The spacing between ticks is directly associated with the trading fee in the Intrinsic contracts. Lower fee tiers enable the inclusion of ticks closer in proximity that have the potential to be active, while higher fees result in relatively wider spacing between potential active ticks.
Although inactive ticks do not affect transaction costs during trades, crossing an active ticket does raise the transaction cost for the specific transaction in which it occurs. This is because crossing an active tick triggers the activation of liquidity within any new positions that utilize the tick as a boundary.
In price regions where capital efficiency is of utmost importance, particularly in stablecoin pairs, adopting a narrower tick spacing enhances the precision of liquidity provision and is expected to reduce price impact during swapping. This outcome leads to significantly improved prices for trades between stablecoins.