A DEEP DIVE INTO XSWAP’S ADVANCED STRUCTURE AND HOW IT WORKS
XSwap has released its latest version, XSwap V3, which includes various enhancements to the automated market maker (AMM) model. Operating on the XDC blockchain or Xinfin network, XSwap provides a decentralized exchange for traders and liquidity providers.
One of the crucial improvements of XSwap V3 is the introduction of concentrated liquidity, which allows liquidity providers to offer their assets within a specific price range and receive rewards based on the level of risk in the pool they are contributing to. It incentivizes more liquidity providers to participate in the network, ultimately leading to higher liquidity for traders and the potential for higher returns. XSwap’s V3 update offers users a more efficient and effective way to trade cryptocurrencies on a decentralized platform.
How Does V3 Work and Its Features?
XSwap introduces several new features compared to the previous version, V2. The core functionality of V3 remains the same as V2, enabling users to swap tokens instantly and directly without intermediaries, but with several key differences.
Here are the new features and their functions:
Concentrated liquidity
Concentrated liquidity is a revolutionary concept in decentralized exchanges, and XSwap has taken it to the next level. By allowing liquidity providers to choose custom price ranges, XSwap has created an opportunity for LPs to maximize their capital usage and earn more rewards.
In traditional liquidity provision models, LPs must allocate their capital evenly across the entire price range. It resulted in inefficient use of capital as it was spread too thinly, leading to lower returns. With concentrated liquidity, LPs can focus their capital where trading activity is highest, ensuring more efficient use of their capital.
XSwap’s implementation of concentrated liquidity also offers individualized price curves to LPs, which cater to their specific needs. It allows LPs to create more efficient curves and maximize their profitability. Previously, LPs had to create separate pools for each curve, resulting in higher gas costs. However, with XSwap’s concentrated liquidity, LPs can enjoy the benefits of individualized curves without incurring additional costs.
When a trade is made on XSwap, the user trades against the combined liquidity available at a specific price point. The combined liquidity comes from all the price curves overlapping that particular price point, providing a more efficient and fair system for LPs to earn trading fees proportional to their liquidity contribution.
With XSwap’s concentrated liquidity, LPs can optimize their capital usage, increasing efficiency and profitability. This feature sets XSwap apart from other decentralized exchanges, placing it at the forefront of the DeFi revolution.
Capital Efficiency
XSwap’s concentrated liquidity mechanism significantly improves over traditional approaches and other decentralized exchanges. This hybrid feature enables liquidity providers to deploy their capital more efficiently by allowing them to select custom price ranges when providing liquidity. This approach creates individualized price curves for each liquidity provider, which leads to better capital efficiency and higher returns.
To illustrate this, let’s consider the example of Joe and Jean, who provide liquidity in the XDC/FXD pool on XSwap. Jean splits her capital between XDC and FXD and evenly deploys it across the price range. Meanwhile, Joe concentrates his liquidity within a specific price range where most trading activity happens. Both will earn the same trading fees if the XDC/FXD price stays within that range. However, Joe only provides 12% of Jean’s capital but still makes the same returns, making his capital 8.34 times more efficient than Jean’s capital.
This approach works even better in more stable pools, where liquidity providers can provide liquidity in particularly narrow ranges, resulting in even better capital efficiency. For instance, if $25M liquidity is held in XSwap V2 XDC/FXD pool were concentrated between the 0.99–1.01 price range in XSwap V3, it would provide the same depth as $5B in XSwap V2, as long as prices stay within that range. With XSwap V3, maximum capital efficiency can be achieved when liquidity providers provide liquidity within a single 0.1% price range, leading to 4000x more capital efficiency than V2. Additionally, the V3 pool factory supports ranges as granular as 0.02%, translating to a maximum of 20,000x capital efficiency relative to V2.
XSwap’s concentrated liquidity mechanism significantly improves capital efficiency for liquidity providers, making it a preferred choice for traders and LPs. With XSwap V3, LPs can optimize their capital usage, resulting in increased efficiency and profitability, which is excellent in the decentralized exchange market.
Active Liquidity
The concept of active liquidity in XSwap is a game-changer for liquidity providers. By enabling LPs to provide liquidity in a specific price range, XSwap ensures that their capital is utilized efficiently. However, if the market price moves outside the LP’s chosen range, their liquidity will be removed from the pool, effectively stopping them from earning fees. This feature allows LPs to actively manage their liquidity and adjust their price range to account for current market prices.
On the other hand, if the market price moves outside the LP’s specific price range, their liquidity will shift towards one of the assets, effectively holding one of them. However, LPs can wait until the market price moves back to their chosen range or update it accordingly.
In cases where there is no liquidity in a particular price range, LPs can provide liquidity in that range and start collecting trading fees. This feature encourages LPs to focus on narrow but profitable price ranges or update their price range when the market moves out of their previous range.
Range Limit Orders
XSwap’s range limit orders are a powerful tool that liquidity providers can use to manage their liquidity and market exposure. With range-limit orders, LPs can provide liquidity for a single token within a custom price range above or below the current market price. If the market price moves within the specified range, one asset is sold for another with a smooth curve, and the LP earns trading fees.
Range limit orders are beneficial when combined with a narrow price range, as they function similarly to a standard limit order that can be set at a specific price. For example, LPs can deposit their XSP to a narrow range between 0.035 and 0.036 XSP/XDC for XDC/XSP trades below 0.035 XSP/XDC. If XDC/XSP trades above 0.036 XSP/XDC, the LP’s liquidity will be converted into XDC. The LP must then withdraw its liquidity to avoid automatically converting back into XSP when XDC/XSP trades back below 0.036 XSP/XDC.
Range limit orders offer several benefits to liquidity providers and traders. Liquidity providers provide an additional tool for managing liquidity and market movement exposure. For traders, they allow new users to express their views on the market by placing limit orders within specific price ranges.
The introduction of range limit orders is a significant step forward for XSwap, attracting more liquidity providers and traders to the platform. The feature provides greater flexibility and customization, allowing users to tailor their liquidity provision and trading strategies to their specific needs.
Flexible Fees
XSwap’s flexible fee structure is a crucial feature that benefits liquidity providers by allowing them to tailor their margins according to the level of risk they are willing to take on. XSwap offers four fee tiers per pair, including 0.01%, 0.05%, 0.30%, and 1.00%, which are determined by the expected volatility of the asset pairs. This range of options allows LPs to choose a fee tier that best suits their risk appetite.
While having distinct fee tiers can lead to liquidity fragmentation, XSwap believes that most pairs will eventually calibrate to a specific fee tier, serving as the canonical market. For example, pairs consisting of the same kind of assets will likely congregate around the 0.01% fee tier, while pairs like XDC/XSP might opt for the 0.30% fee tier. XSwap also offers a higher fee tier of 1.00% for unknown assets, which may be more appropriate.
XSwap’s flexible fee structure is a powerful tool for LPs to customize their margins according to expected pair volatility, maximizing their returns while minimizing risk exposure.
Difference Between V2 and V3
The latest version of XSwap, V3, introduces several significant improvements for liquidity providers compared to its predecessor, V2. Here are some of the key differences:
- Concentrated liquidity: Rather than spreading liquidity evenly across the entire price range, V3 allows liquidity providers to concentrate their liquidity within a specific price range. This feature improves capital efficiency and will enable LPs to maximize their returns.
- Active liquidity: In V3, if the market price moves outside the LP’s specified price range, their liquidity will be removed from the pool, effectively stopping them from earning fees. This feature incentivizes LPs to maintain up-to-date price ranges to maximize their earning potential.
- Range limit orders: V3 allows LPs to provide liquidity for a single token in a custom price range below or above the current market price. If the market price enters the specified range, one asset is sold for another with a smooth curve while still earning trading fees.
- Multiple fee tiers: LPs can charge up to 1%, 0.3%, 0.05%, or 0.01% trading fees depending on the liquidity pool’s size and the level of risk they’re willing to take. This feature offers more flexibility for LPs to tailor their returns according to their risk appetite.
- More granular price ranges: LPs can create liquidity pools with price ranges as granular as 0.02%, which allows for more concentrated liquidity and capital efficiency.
XSwap V3 offers more flexibility, capital efficiency, and earning potential for liquidity providers compared to V2. It represents a significant improvement in the development of decentralized exchanges and has the potential to attract more liquidity and trading volume to the platform.
In conclusion
XSwap introduces innovative features that provide liquidity providers with increased capital efficiency and flexibility. The concentrated and active liquidity features enable LPs to earn higher returns with less capital at risk, allowing them to manage their liquidity better and adjust their price ranges based on market conditions. The range limit order functionality offers LPs greater control over their liquidity and enables them to earn trading fees in custom price ranges.
Moreover, XSwap’s upgraded AMM algorithm offers better price accuracy and lower slippage, improving the trading experience for users. These features set XSwap apart from other decentralized exchanges and have the potential to attract more liquidity and trading volume to the platform. XSwap is an exciting development in decentralized finance, offering new opportunities for liquidity providers and traders alike.
