🛁V3 Liquidity Pool
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Liquidity provision is the most crucial aspect of the AMM V3 operation, and the role of market makers can't be overlooked. That's why Biswap encourages you to become a Liquidity Provider and experience all the benefits of the new AMM together.
A Liquidity Provider is a user that deposits crypto into the liquidity pool and gets rewards in return. By liquidity provision, they become the source of trading volume that ensures that trades can be executed as planned and at the desired prices. This way, Liquidity Providers may also be called market-makers, as they influence the trading environment.
Automated market makers (AMM) allow automatic exchanges within liquidity pools, as prices are determined by a liquidity amount and calculated by a mathematical formula. This way, AMM allows trade without third parties or intermediaries.
Why are Liquidity Pools important?
A liquidity pool is a cryptocurrency locked in a smart contract that allows trading on the decentralized exchange. In other words, trading occurs within a liquidity pool, which means that the more liquidity (locked crypto) in the pool, the faster and more profitable trades will be. For this reason, Liquidity Providers directly impact the trading process on the DEX, as they are incentivized to contribute to these pools through earning fees from the trades that happen within the pool. This is a key aspect of why liquidity pools are important.
Biswap AMM V3 aims to distribute liquidity more efficiently than a previous version do and, as a result — maximize benefits for Liquidity Providers and traders.
New AMM allows Liquidity Providers to be flexible in their strategies and scale up their capital efficiency by up to 4000x. Look at the great opportunities awaiting Biswap investors.
80% LP rewards Liquidity Providers receive up to 20% higher LP rewards among other V3 DEXs. They get 80% LP rewards from trading fees for swaps and 80% LP rewards from trading fees for limit orders. LP rewards are paid in token pair users provide liquidity for.
Multi-tier fees for pools Liquidity Providers can select among multi-tier fees for their liquidity positions that will be paid by traders. This way chosen fee tier will impact their profit from LP rewards and ensures variability.
Automatic participation in V3 Farms If the set range is matched with the current price, and the chosen fee tier has active Farm rewards, the Liquidity Provider starts to earn them with no additional staking. Also, users will spend less on transaction fees as they no longer need to stake LP tokens to activate Farms.
Learn important aspects of AMM V3 liquidity that might be new or different from your previous experience.
When users provide liquidity on V3, they will receive an NFT LP instead of LP tokens, like it was on V2. It maintains all the data that concerns your position in the liquidity pool and provides you with actual information.
NFT LP is a 'non-fungible token' that represents and proves your participation in the liquidity pool, but you don't need to stake it in order to participate in V3 Farms.
You can view your position at https://biswap.org/pool/v3/ID, where ID is the position number (NFT LP ID)
To find your position ID do the following steps:
1. Open the https://bscscan.com (same for other chain explorers)
2. Paste your wallet address into the search box
3. Head to the NFT Transfers tab
4. Open a transaction with the Multicall method
5. Find your token ID as shown in the screenshot
V3 AMM allows Biswap Liquidity Providers to deposit their crypto for a particular price interval by setting a price range. Users can set one or multiple positions with the same or different price ranges for a liquidity pair. It means that liquidity will be used within a certain price interval, where most trades occur, instead of being distributed along the price curve between 0 and infinity.
By narrowing the price range, Liquidity Providers can decrease the impermanent loss, thereby preserving a portion of their capital. Note that it also depends on users' strategy, range size, and other factors.
To understand how AMM V3 liquidity distributes and brings income, let's divide it into a few states: concentrated, active, and inactive liquidity.
When the range set by a Liquidity Provider intersects or matches the real price diapason where trades occur, their provided liquidity starts to bring profit. Once liquidity is active, users receive LP rewards and automatically participate in V3 Farms, which also brings profit.
Example:
APR figures are conditional
You are providing liquidity in the BSW/USDT pair. Let's say the BSW price is 0.25 USDT. You have provided 1000 USDT+4000 BSW=~$2000, then you have set a price range for BSW/USDT of +50% to -50%.
It means you will receive a commission when the price ranges from 0.125 USDT to 0.375 USDT per 1 BSW.
If, for instance, you want to lock the LP for 30 days, your APR will be 20%. You will earn rewards as long as the price stays within the specified price range.
Let's take the price fluctuation within the range of 0.2 to 0.3 in our example. In this case, as an LP provider, you will approximately receive:
2000 * (0.2(APR)/12) = $33.3 in BSW and USDT tokens
📍 If the price goes beyond the set range, APR will not be accrued.
📍 If the price exceeds the upper limit (0.375 USDT per BSW), the position will only consist of USDT.
📍 If the price falls to the lower limit (0.125 USDT per BSW), the position will fully transition to the volatile asset — BSW.
The narrower the range you set, the higher your APR becomes, as its liquidity is used much more effectively.
For example, by setting a range of +100% and -100%, you will receive a 5% commission, and by selecting a price range of +10% to -10%, you will receive a commission of 256%.
Because of market volatility, crypto prices can move outside the range set by the Liquidity Provider. Once it happens, the liquidity stops earning fees and becomes inactive. To activate liquidity, users have to rebalance it manually. It will be necessary to withdraw the inefficiency liquidity and provide it for a corresponding price range to start earning.
Liquidity Providers will be able to choose a fee tier for the liquidity they supply crypto in: 0.015%, 0.08%, 0.28%, 1%. These fee tiers correspond to different pools. By setting a particular fee tier, Liquidity Providers select the pools according to the risk they are willing to take due to each pair's volatility.
For example, higher fees are more suitable for those pairs where less liquidity is provided, and more volatility is expected, while lower fees are more suitable for more stable pairs. By applying different fees, Liquidity Providers can potentially compensate for the impermanent loss from volatility with LP rewards.
Multi-tier fees apply to regular swaps, not limit orders. Each fee-tier option has a description that represents the best option according to a type of liquidity pair:
0.015% for pair of stable tokens, such as USDT/USDC
0.08% for pair of stable tokens and non-stable tokens, such as USDT/ETH
0.28% for pair of non-stable tokens, such as ADA/BNB
1% for pair of exotic tokens, such as WBNB/SFP
