Introducing the first major part of Gyroscope: Concentrated Liquidity Pools
Concentrated Liquidity Pools (CLPs) are a new type of AMM designed to store Gyroscope reserve assets, while providing increased capital efficiency and a better user experience. Read on to learn more about two types of CLP, why they’re useful, and how you can test them.
Concentrated liquidity pools (CLPs) are the first major part of the Gyroscope protocol.
CLPs are types of Automated Market Maker, designed by Gyroscope. They price the exchange of assets within a defined range to increase the capital efficiency of market making in liquidity pools.
As part of getting ready for the launch of the Gyroscope Protocol, as mandated by the community, two CLP types: 2-CLPs and 3-CLPs were launched.
Right now, both types are currently live on Polygon, where you can test them in capped mode (per address and per pool). At present, 3-CLP pool is also currently the first to be offering liquidity for the new native BUSD on Polygon.
In the future, Gyroscope reserve assets could be stored in CLPs. A third type of CLP will be announced at a later date.
What are CLPs?
Concentrated Liquidity Pools (CLPs) are AMMs that price the exchange of assets within the pool in a predefined price range. Their liquidity is restricted to this range, which improves capital efficiency, since pool assets are not reserved for trading at uncommon prices.
Gyroscope’s CLPs include pools with two or three assets:
- Pools with two assets
These are quadratic-concentrated liquidity pools or 2-CLPs, named after the quadratic invariant curve. 2-CLPs are similar to Uniswap V3’s concentrated liquidity pools. But unlike Uniswap, a 2-CLP effectively offers a ‘single tick’, where liquidity is distributed evenly across a single active trading range.
As such, you can think of 2-CLPs as a simplified design of Uniswap V3. Specializing the design for the most traded ranges of included assets enables a pool to have (i) high capital efficiency, (ii) high gas-efficiency, and (iii) a simple UX.
- Pools with three assets
These are cubic-CLPs or 3-CLPs, which support liquidity concentration for three assets and amplify the benefits of 2-CLPs. An intuitive way of thinking about 3-CLPs is to imagine a pool that unites two of the most impactful AMM innovations: multi-asset pools and concentrated liquidity.
Assets that can be expected to trade in a common trading range will be suitable for 2-CLPs and 3-CLPs. For example, ‘like-to-like’ assets (such as USDC/USDT) and also major pairs (such as ETH/ WBTC, which historically traded in a common trading range) can be suitable assets.
How are CLPs useful?
2-CLPs offer three main benefits:
- Increased capital efficiency: 2-CLPs improve capital efficiency of the Balancer ecosystem. 2-CLPs bring the capital efficiency of Uniswap V3 to Balancer pools.
- Increased gas efficiency: 2-CLPs are designed to be highly gas-efficient. 2-CLPs adopt the efficiently-computable constant-product pricing formula [1]. 2-CLPs are also designed to integrate with Balancer. Balancer V2 allows composing trades between several pools in a highly gas-efficient manner, laying the foundation for Balancer’s Smart Order Routing [2].
- Simplified user experience: 2-CLPs are designed to be as simple as possible. The 2-CLPs design can be considered a specialized variation of Uniswap V3, as the full generality of Uniswap V3’s tick system is not always needed. A simpler pool architecture means liquidity can be provided with a less demanding user experience.
3-CLPs offer the same benefits as 2-CLPs — to an even greater degree:
- Increased capital efficiency: By concentrating liquidity between three assets, 3-CLPs are 50% more capital efficient than two 2-CLPs. They achieve this by aggregating the liquidity of all three assets in a single pool.
- Increased gas efficiency: Trading among three assets is more gas efficient than connecting two trades through two different 2-CLPs.
- Simplified user experience: 3-CLPs make for an even simpler architecture and user experience.
3-CLPs’ price bounds work in a similar way to those of 2-CLPs. One key difference is that, for 2-CLPs, the lower price bound within the pool cannot be hit for two assets at the same time. For further detail about the design of 2-CLPs and 3-CLPs, refer to this documentation.
Once Gyroscope has been launched on mainnet, CLPs can be used in two different, yet mutually beneficial, ways:
- Gyroscope reserve: It is expected that most Gyroscope reserve assets will be stored in some CLPs. Fee revenue from CLPs can help to increase the protocol collateralization ratio.
- Direct LPs: As they will hold protocol assets, these CLPs will likely offer substantial liquidity. However, CLPs also remain open to direct liquidity providers. Direct LPs can thus access pools with bootstrapped, deep liquidity at the most commonly-traded ranges (and in turn generate LP fee revenue). Additionally, all trades will be channeled through Balancer’s Smart Order Routing.
CLPs help create a mutually beneficial cycle. The two uses of CLPs benefit each other:
- Once reserve assets are deployed, LPers benefit from having pools of substantial liquidity with high capital efficiency. This increases pool activity and thus fee revenue.
- The Gyroscope protocol, in turn, benefits because a small fraction of the revenue of CLP LPs could be captured via a protocol fee.
- The interplay between LPers and deployed reserve assets creates economies of scale that positively impact pool activity.
What are the risks of CLPs?
As with any smart contract, there is an inherent risk that an exploit or bug puts deposited assets at risk. This risk can be reduced by conducting code audits and tests, but can never be completely eliminated. The 2-CLP and 3-CLP underwent two audits. The first audit report, conducted by Nethermind, is available here, with the second to follow shortly.
Additionally, the high capital concentration amplifies general risks common to AMMs, such as adverse selection risk (lagging prices that are ‘updated’ by arbitrageurs) and strategy risk (committing to a portfolio strategy).
The ‘amplification’ of these risks arises from the fact that CLPs allow more trading at any price within the pool’s price range. 3-CLPs further have a new asset-interaction risk.
Risks are further described in the docs and Terms of Service. Please make sure that you make yourself aware of the risks and only interact with CLPs if you understand and accept the risks.
Capped CLP launch on Balancer Polygon
The Gyroscope protocol is composed of several key parts, which will be launched in phases during Q3/Q4 of 2022. The CLPs are the first of these parts. Two capped pools are now live on Polygon:
- A 2-CLP pool for WBTC/WETH with price range 11.1111–20.0000
- A 3-CLP pool for USDC/BUSD/USDT with price range 0.9985–1.0015
These CLPs have been audited, the reports of which will soon be released. However, audits aren’t always enough to ensure code is bug-free. So, as part of a responsible deployment process, these pools with asset caps of $100,000 USD were deployed. To ensure their testing with multiple smart contract function calls (adding and withdrawing liquidity) is thorough, there is an additional cap of $20,000 per address. This will avoid that the pool cap will be reached with only a few smart contract interactions.
In the future, CLPs will be used for deploying Gyroscope reserve assets, as well as generally available as a new type of Balancer pool that anyone can spin up.
Test the launched CLPs on Polygon:
- Test the 2-CLP and 3-CLP here
Please note:
The launched CLPs have asset caps, set per address and per pool.
This is because the current goal is *not* to obtain a high TVL, but to test the CLPs in production while enforcing risk controls.
Similar to the testnet walk-through, the phased launch of Gyroscope will make it easy for you to follow along and explore the various components of the live Gyroscope protocol, starting with the 2-CLP and 3-CLP. Launching on Polygon first has several benefits: it feeds into the broader ambition to be present on all EVM-compatible chains, while carving out a cleanly separated ‘test in prod’ platform with low costs for users to test the new pools.
Be among the first people to test the newly launched Concentrated Liquidity Pools.
[1] Paradigm, ‘Understanding Automated Market-Makers, Part 1: Price Impact’, available at: https://research.paradigm.xyz/amm-price-impact
[2] Balancer, ‘Smart Order Router V2’, available at: https://docs.balancer.fi/developers/smart-order-router
