Built On Balancer — Elliptical Concentrated Liquidity
In this series, we will explore how, and why teams are leveraging the unique Balancer technology stack to build programmable financial innovations. We will uncover the unique AMM models that teams are building and showcase some of the most innovative developments happening within the Decentralized Financial field.
To start, we will explore Gyroscope, an innovative all-weather stablecoin protocol that has developed a unique Elliptical Concentrated Liquidity AMM model using Balancer Technology.
#BuildOnBalancer
With the launch of V2, Balancer solidified its position as an innovation hub. Notable technological advancements, such as the Vault, separated the fundamental components of a DEX from the more intricate aspects, such as the AMM design itself. This move not only positioned Balancer as a forward-thinking and pioneering DEX but also as the foundational technology for nurturing future DeFi innovations.
DeFi provides participants with a permissionless technology stack to access finance without restriction. The range of assets accessible continually grows, and with this, the way that these assets trade must evolve too. Some assets function to provide stability, whereas others utilize inbuilt yield appreciation mechanisms. Ensuring that the underlying characteristics of specific assets are accounted for in the mathematical curve that defines how they trade is essential. This is the role of the AMM.
Simplistic AMM Design
The simplistic beauty of the Vault’s architecture is that it supercharges the ability to build a fully functioning and integrated AMM. Unlike every DEX that internalizes accounting separately within each pool, the Vault manages all DEX’s liquidity and accounting in a unified contract. When assets trade, balance changes are managed by the vault, which then plugs into external contracts that define the specific AMM logic utilized (such as weighted math, boosted pools, and stableswap).
This unique design means that all of Balancer’s liquidity is stored in one interconnected hub, providing developers with instant access to DEX liquidity, incentive structures, swap routes, and aggregator integrations. Put simply, Balancer streamlines and simplifies AMM development.
GYROSCOPE
Having authored seminal papers on stablecoin design and DeFi risk including Stablecoins 2.0, the Decentralized Financial Crisis, and While Stability Lasts, the Gyroscope team is no stranger to innovative financial modeling. The Gyroscope Protocol is a novel all-weather design approach to solve the critical issues facing stablecoin risk, adoption, and sustainability. Gyroscope’s implementation of an innovative stablecoin mechanism utilizes autonomous mechanisms for risk control, optimized trading pools, and a diversified basket of highly capital-efficient assets.
When defining which assets would back, and provide swap routes for said stablecoin, the Gyroscope team realized the efficiency and flexibility they sought were not currently available on the market. Rather than taking an arduous amount of time to design and build a DEX, onboard liquidity, launch an incentive token, and integrate aggregators, Gyroscope leveraged Balancer Technology.
Concentrated Liquidity
Concentrated Liquidity (CL) is a form of AMM design that looks to vastly improve a pool’s efficiency by concentrating the underlying assets within areas of high trading volume. In effect, CL provides deep liquidity at a fraction of the TVL, ensuring a majority of LP’s assets are effectively utilized for swaps.
Uniswap V3 introduced one form of CL. This model sees users actively select the specific range in which their liquidity is evenly spread. Although this could be considered highly efficient (if the assets continuously trade within this range), it also comes with inherent risks. Tight ranges greatly increase the likelihood that the volatility of an asset will cause the trading price to exit the pre-defined price bound. If this happened, it would not only cause a loss in swap fees but also cause a user’s entire position to swap to a single asset. In volatile market conditions, this could result in a large loss of earning potential and drastically increase impermanent loss. As a result, Uniswap CL positions require constant monitoring and adjustment.
Uniswap V3 risk is not limited to volatile market conditions; take a Liquid Staked Token pool for example (such as wstETH/ETH), due to the internal staking rewards being recycled into the token, the pool ratio is continually increasing relative to the underlying token. This means that within a typical CL position, the trading price naturally leaves the set price bounds unless suitably adjusted. In addition, as yield accrues, an arbitrage opportunity is constantly arising causing a drag on value accrual in the pool. During the development of Gyroscope’s stablecoin model, and underlying collateralized positions, they sought out a design that not only provided the efficiency of CL but also built off the shortcomings of the Uniswap model. Gyroscope sought a flexible and passive concentrated liquidity AMM.
E-CLP
Unlike uniform, concentrated liquidity profiles, Gyroscopes E-CLP abandons constant product curves and instead focalizes the trading of assets along the curve of an ellipse. This allows a further degree of flexibility as liquidity no longer needs to be spread evenly within uniform price bounds.
Striped back to the nuts and bolts, two key aspects set E-CLPs apart from the rest:
- Price Bounds
- Custom Liquidity Profile
Price Bounds
Similarly to other concentrated liquidity, the E-CLP efficiency comes from “bounding” the trading curve to an expected trading range, focalizing liquidity in areas where it’s most utilized. However, seeking simplicity and optimal user experience, the Gyro team set out to implement a solution that required minimal monitoring and adjustment.
Unlike any other form of concentrated AMM curve, Gyroscope’s E-CLPs provide passive liquidity management; instead of users setting price bounds themselves, the pool deployer takes on the responsibility of calibrating and establishing the trading parameters upon launch. The result is that when a user engages with the pool, it functions just like any other Balancer pool — No rebalancing or bound adjustments are required.
E-CLPs intertwine a simplistic stable swap pool UX with the efficiency of Uni V3.
This not only vastly improves user experience but also mitigates the aforementioned risks of the trading price exiting the user-set price bounds.
Custom Liquidity Profile
A distinctive feature of E-CLPs lies in their non-uniform liquidity profiles. Harnessing the curve of an ellipse allows for highly customizable trading profiles and can even be used to approximate many other common AMMs structures. This design provides a highly adaptable trading curve that allows the pool composer to purposefully design areas of high and low price impact.
For example, by leveraging Balancer’s rate providers (that utilize onchain queries or chainlink oracles to update the correct ratio of LST tokens) an LST range can be programmatically accessed by the pool creator, concentrating liquidity around the current ratio, and residually reducing it at other ratios. This means that, unlike traditional CL, E-CLPs are perfectly suited to accommodate LST growth. E-CLPs also enjoy increased LST yield exposure due to the E-CLP’s asymmetric elliptical curve, which minimizes idle ETH.
Another example of E-CLP’s innovation is stablecoin peg protection. Newly launched stablecoins often fall victim to deviations in the peg. In this scenario, no matter the current ratio, a traditional stableswap model continues to trade at 1:1, causing the pool to continually fall further out of balance resulting in inefficiencies and slippage for large trades. An E-CLP could instead be calibrated to focalize liquidity around the current ratio, with the curve slowly orientated towards the desired area of trade — 1:1. The flexibility of an elliptical curve provides stablecoin providers with a unique tool to rebalance and stabilize pool parameters.
Performance
For any AMM to function successfully, swap volume is key. A pivotal part of this equation is aggregator integration. Over the past few years, we have seen a vast portion of onchain volume shift to aggregators rather than directly through a DEXs swap interface. The result is that even if the AMM offers the most efficient swap rate, the pool will be ignored without onboarding into aggregators.
However, for a DEX’s liquidity to onboard into aggregator swap routes, a chicken and an egg problem arises. First, the DEX needs to have ample liquidity to provide low-slippage swaps, secondly, the DEX must showcase considerable swap volume. This means that for new protocols to gain any volume market share, they must first heavily incentivize liquidity and undercut swap fees. Put simply, new protocols commonly must launch a new token with a highly inflationary emission schedule to gain traction.
With protocols such as Gyroscope building on Balancer, the protocol gains instant integration into all aggregators currently supported, unlocks swap routes between every pair on the DEX, and instantly plugs into Balancer incentive structures. With this, Gyrsocope’s E-CLPs now host over $17 million in TVL and have facilitated over $100 million in swap volume.
These metrics are increasing at an accelerating rate, and have been achieved without launching an incentive token, new aggregator integrations, or highly inflationary emission schedules. This is the simplicity of Building on Balaner; protocols focus solely on AMM innovation, with everything else ready from the get-go.
“The success of a decentralized stablecoin is deeply rooted in how efficiently it can be integrated into DEXs. The E-CLP arose in designing Gyroscope to tackle two challenges here: (1) how to achieve market depth around peg for a new stablecoin with as great as possible capital efficiency, and (2) the development of LP shares as a new collateral class to back a stablecoin. This unlocks further capital efficiency and uses Balancer as a safe architecture for composability.
The E-CLPs leverage Balancer’s customizable AMM logic. As a result, we could focus all effort on the core technical challenge of building the pricing curve while relying on seamless integration with existing Balancer infrastructure to bring it to market.”
— Ariah Klages-Mundt, Superluminal Labs (developer of Gyroscope)
Outro
As the saying goes: “Build it and they will come”. Balancer has built a refined tech stack streamlining the process of delivering new AMM innovations to the market. Gyroscope is but one example of the industry-leading tech flourishing on Balancer.
Join us in this ongoing “Built on Balancer” series as we delve deeper into the thriving community around us. As the protocol continues to foster innovation within its ecosystem, we eagerly anticipate what groundbreaking technologies and protocols will emerge.
Build Better. Build on Balancer.
