Concentrated Active Liquidity Management (CALM) Proposal
Summary
Parallax is introducing Concentrated Active Liquidity Management (CALM), a solution for automated and active management of concentrated liquidity. CALM is designed to complement our existing product suite and is an addition to our newly revised framework, which includes:
- Passive Liquidity Management (PLM) Strategies
- Concentrated Active Liquidity Management (CALM) Strategies
Motivation
Parallax aims to be the algorithmic liquidity management hub that further innovates within the realm of liquidity management. This allows the protocol to:
- Empower users by providing safe and optimal yield opportunities.
- Create a dynamic flywheel driven by yield and tokens within the ecosystem.
- Adapt to changing narratives and market dynamics.
As the native liquidity infrastructure of Arbitrum, Parallax goes beyond the conventional role of “yield optimizers”. The Parallax team consistently evaluates the feasibility of our product offerings to maintain competitiveness in the rapidly evolving DeFi landscape.
The development of CALM strategies would demonstrate our strong commitment to building a decentralized liquidity management infrastructure to support the development of automated vaults with best-in-class yield and low user complexity. To attract new users, we recognize the importance of bringing a fresh perspective and solutions to the table.
Proposal
The post presents Parallax to become the liquidity management hub through the introduction of Concentrated Active Liquidity Management (CALM). CALM will establish a new framework for liquidity management and ignite a thriving yield ecosystem for Parallax-ors. CALM is a distinct product, separate from the Passive Liquidity Management (PLM) — the foundation for our current yield products.
The first iteration of CALM strategies will be built on Uniswap V3.
Uniswap v3 introduced the concept of “concentrated liquidity”, where liquidity is bounded within a specific range. Instead of being evenly distributed along the reserve curve, liquidity is allocated by users based on their range preferences. Uniswap v3 incentivizes users to provide liquidity within a range that facilitates trading in a pool. Therefore, understanding liquidity provision principles and being able to adjust position ranges can lead to increased user profits. Due to the complexity and sophistication of Uni v3, individual investors may not have the necessary tools and are required to perform additional actions to achieve higher yields, such as:
- Choose the most suitable price range.
- Regularly rebalance it.
- Incur gas fees multiple times.
Parallax will offer automated position management to cater to this need.
Execution
The CALM solution follows the following architectural flow:
In the initial version of the CALM products, users have the option to delegate position management to Parallax through Uniswap v3 NFT staking on the Parallax dApp. This allows users to earn a higher yield. Staking on Parallax enhances the capital efficiency of utilizing Uniswap v3 pools on any network and pool. The following chains have NFT staking contracts available:
- Ethereum
- Arbitrum
- Base
The Uniswap v3 NFT Staking on Parallax includes several features:
- Deposit NFT
- Split NFT into underlying assets
- Provide liquidity to a Uniswap v3 pool
- Adjust a pool position price range
- Distribute pool rewards
- Claim staking rewards
- Withdraw funds from staking
Users can only deposit specific Uniswap v3 LP tokens. These tokens are part of a predefined whitelist, which may change over time. Pools are added to the whitelist based on their top trading volume and high TVL on their respective chain. We have identified several pools to be included in our CALM strategies. The final selection of Uniswap v3 pools will be determined prior to production stage.
Ethereum
- USDC-WETH
- WETH-USDT
- WSTETH-WETH
- USDC-USDT
- WBTC-WETH
Arbitrum
- WETH-USDC.e
- WETH-USDC
- WETH-USDT
- WETH-ARB
- WBTC-WETH
Base
- WETH-USDBC
- CBETH-WETH
- WETH-BASED
- BALD-WETH
- WETH-BOOST
CALM’s Automated Position Management
The CALM system deposits assets from all deposited NFTs into the specific Uniswap v3 pool. Upon depositing, the system defines the optimal price range for a position. To summarize the parameter values of the optimal price range, the system factors in volatility, divergent loss, and trading activity to calculate optimum values for lower and upper ticks to constitute a position range in order to maximize income. The system generally seeks to maximize fee generation and minimize impermanent loss.
The income from trading fees is:
Where Q is the quantity of swaps. P is the fee level. N depends on the position range ceteris paribus. In simpler terms, when liquidity is more concentrated around the trading price, it can facilitate more trade volume and consequently generate more fees.
Illustration of Concentrated Liquidity Provision & Price Range
As the price of an asset changes after each swap, the system will need to make adjustments at a given frequency (e.g., once an hour) or based on a price shift (e.g., if the price changes by 1%).
Frequent adjustments imply severe gas cost impact, especially on the Ethereum network. Given that Parallax manages a single position per pool, there is a gas-saving effect. This factor significantly contributes to overall staking profitability, benefiting both Parallax and its users.
The system can adjust and switch between two options: Option A, where fees are high but accrued relatively rarely because most swaps occur outside the specified price ticks (for narrow ranges), and Option B, where fees are low but accrued permanently because most swaps occur within the specified price ticks (for wide ranges).
For simplicity, the initial version of Uniswap v3 NFT staking on Parallax takes a minimalist approach to establishing and adjusting the position price range. Its main characteristics are:
- Both volatile and stable pairs have the current price set as the center of the range.
- Both volatile and stable pairs have a uniform spread in both directions, towards the lower tick and the upper tick.
- The spread value for volatile pairs is greater than the spread value for stable pairs (10% for volatile pairs and 5% for stable pairs).
- The range is adjusted if the current price falls within the tenth percentile (both lower and upper) of the given price range.
- The range spread rate remains unchanged after an adjustment (it always stays the same).
Based on our modeling, the liquidity calculation in Uniswap v3 also exhibits several notable characteristics:
- It is possible to expand a symmetric price range to a certain extent (e.g. ±10% from the current price) without impacting the liquidity amount.
- This specifically applies to shifting the upper tick.
- The liquidity amount varies as the price of an asset rises or falls, while the spread in a symmetric price range remains constant.
Example:
In a WETH-USDC pool, the current price is 1500 USDC for 1 WETH, and the pair is considered volatile. The spread is 5%, resulting in a price range of [1425;1575].
After a number of swaps, the current price in a WETH-USDC pool is 1570 USDC for 1 WETH. The current price range is [1425;1575]. The system needs to update the price range based on the current price (1570). Therefore, the new price range is [1491.5;1648.5].
Fees are only accrued when the trading activity happens within set price range
Simple illustration of range adjustment to ensure price is within range to capture fees
Competitive Landscape
We have mapped out the leading competitors’ liquidity management solutions — Gamma and Arrakis Finance, in comparison to Parallax’s in the whitepaper.
What are Passive Liquidity Management (PLM) Strategies?
PLM strategies form the foundation for our current yield products and will be encompassed within the PLM framework. Going forward, we will no longer use the specific names for these yield products:
- Orbital: Auto-compounding strategies
- Andromeda: Multi-variant yield
- Supernova: LST strategies
Instead, we will collectively refer to them as PLM. Since these products are already live, this section will provide an overview of PLM.
Parallax’s PLM strategies enable users to earn yield from liquidity strategies by facilitating their deposits and earnings seamlessly through our vaults. The sources of yield include, but are not limited to:
- AMM DEXs
- Oracle-Based DEXs
- Cross-chain Protocols
- Stablecoin & CDP Protocols
- Liquid Staking Protocols
- Lending Protocols
For average investors who are looking to grow their idle assets, the mechanics and interactions on various platforms may seem daunting. Parallax’s PLM strategies offer seamless deposits and automate the process of yield optimization and liquidity management via auto-harvesting and compounding of fees earned and incentives back to the user deposits so that users get the most yield from the strategies. It does not require any active management of funds within the vault.
Summary of PLM main features:
Dynamic Swap Module
- Enable the deposit of any single whitelisted asset, automatically swapping the deposited assets into the necessary liquidity pool composition.
Multi-Layered Yield
- Integration of LSTs, allowing users to earn yield from LSTs and their respective LPs.
- Protocol integration offers additional liquidity incentives on top of the base yield.
Recursive Compounding
- Harvesting rewards and reinvesting them back into user deposits to maximize yield.
Multi-Strategy
- Support multiple strategies simultaneously, allocating capital accordingly if applicable.
Call to Action
We are calling all Parallax-ors to vote on this proposal commencing on 30th Oct, UTC 1pm with a snapshot taken before voting starts.
Eligible voters include all $PLX stakers here: https://parallaxfinance.org/staking/
For every $1 worth of $PLX staked, stakers get:
- 1 vote in the 3-month vault
- 2 votes in LP farm
- 3 votes in the 12-month vested vault
If the proposal is approved, Parallax will include the new CALM & PLM integrations and strategies in the next update.
This update will also include the revised roadmap and plans to stimulate the growth of the Parallax ecosystem.
👉 Read the whitepaper of CALM strategy for Uniswap v3 in full details here
