Hydra DEX Launches Concentrated Liquidity and V3 Pools!

We are thrilled to announce another significant milestone: Concentrated Liquidity and V3 Pools are now available on the Hydra DEX!

This exciting new feature greatly enhances the capital efficiency and flexibility of our platform. With the V3 toolset, you can create new pools and add liquidity to existing ones with ease!

As liquidity migrates from V2 to V3 pools, traders will enjoy a noticeable improvement in terms of liquidity depth and reduced slippage. Prepare yourself for larger trades and smoother transactions than ever before!

Let’s explore the new features together.

What are V3 Pools and how do they work?

V3 Pools are a new type of liquidity pool recently introduced on the Hydra DEX platform. So far, all the pools you are used to from the Hydra DEX were V2 pools. These are desgined with continuous liquidity spread throughout the entire price range — starting from $0 and extending to infinity.

Concentrated Liquidity

One of the innovations with the V3 pools is that it becomes possible to concentrate liquidity in certain price ranges. As you may imagine, spreading liquidity from $0 up to infinity is very inefficient.

Most of the time, only 10–20% of the provided liquidity is actually utilized, with the remaining 80–90% sitting in idle ranges far away from the current price level.

Imagine focusing all of your liquidity in a closer range to the prices that actually matter. This is what V3 makes possible!

Let’s take an example of a stablecoin pool, via the USDC/USDT pair.

Below you will find a snippet of the V3 interface for providing liquidity into the pool. Notice the price range on the left side, which can be specificied for every position separately. In this example we select a price range of 0.9–1.1, which is more than sufficient given that the asset values are expected to stay pegged at $1.

In practice, we expect extremely tight ranges with less than 1% deviation from the peg. By narrowing down the range, all liquidity is directed towards where it matters — thus unlocking up to 50x more capital efficient positions.

From a traders perspective, this translates to 50x bigger trades that can be facilitated at the same cost.

50x bigger trades mean that given the demand, up to 50x higher volumes can be supported with the same liquidity. Of course the efficiency gains depend strongly on the ranges supported. But even for volatile assets, we expect an improvement of 5–10x compared to the current levels.

Flexible Fee Settings

Another useful feature coming to the Hydra DEX is the possibility to create pools with different fee levels. There are 4 options to choose from, as shown below:

With V2 pools, the default fee range is set to 0.3% and there is no option to set it differently. While the default works fine and comes close enough to the needs of various asset pairs, it doesn’t optimize for any of them.

For example, stablecoin pools perform best with low fees:

• Liquidity providers are not exposed to the risk of impermanent loss, which means that low trading fees are sufficient to attract capital
• The very tight price range of liquidity concentration allows for a leveraged return on capital, acting as a booster to trading fee income
• Traders are extremely sensitive about losses during stablecoin conversions. Who would want to trade 10,000 USDT for 9,970 USDC? It’s an unnecessary and very evident loss. 10,000 USDT for 9,999 USDC is much more acceptable
• Stablecoins often act as bridges for multi-hop swaps. Therefore, having low fees at these pools lowers the cost for virtually all trades on the DEX.

In contrast, illiquid and volatile assets perform best with high fees:

• Liquidity providers are exposed to a high risk of impermanent loss, which means that high trading fees are required to compensate for it
• The volatile nature makes it difficult to concentrate liquidity, thus preventing a leveraged return on capital
• Traders are insensitive about swap fees, given that price volatility and slippage costs (due to low liquidity) are for more relevant to the locked-in price
• Higher trading fees actually support the much needed liquidity debth, as they accrue directly inside the pool

Thus, having the flexibility to deploy pools with optimized fee rates will have a notable impact on the user experience and performance of the Hydra DEX.

Hybrid Swap Module

The beauty of the new features is that V2 pools and V3 pools can coexist in the same ecosystem. The user interface is capable of utilizing both in a hybrid model, where it will compare the optimum swap routes regardless of pool technology. In the below screenshot you will notice that it chose a V2 gateway for the HYDRA → USDT swap, but a V3 gateway for the HYDRA → LOC swap.

The information quality displayed to the user was also improved considerably, with more detailed trade route information and a clean presentation of the expected output as well as the price impact from slippage.

Migration of Positions from V2 to V3

Suppose you already have liquidity positions in V2 pools. In that case, you can easily take advantage of the one-click migration feature available within the pool section to migrate your liquidity to V3 pools.

Note: We don’t recommend to migrate your positions just yet. Please wait for further notice, especially for pools that are part of the liquidity mining program.

The interface will provide you with all the necessary information you need to complete the migration process. Keep in mind that you’ll be required to set your price range and choose the fee tier during the migration.

During the migration, the system will return any surplus assets that cannot be utilized within the price range you set. It’s essential to keep this in mind while performing the migration. If you wish to avoid having any surpluses, you can experiment with the price range until it is adequately balanced.

As you proceed with the migration, you’ll observe that you’re exchanging LP Tokens for a LP NFT, as shown in the above screenshots. This represents another crucial difference between V2 and V3 that we will examine in more detail below!

Liquidity Provider NFTs

V2 worked with a static liquidity system where all positions are treated equally, with the only difference being in the amount. Hence, it was possible to work with LP tokens which represented your ownership and share of the pool.

V3 introduces a more nuanced approach because, in addition to the amount of liquidity provided, there is also a component of price ranges. This is why we now need to work with NFTs, which allow for multi-dimensional data to represent ownership and share of the pool.

Liquidity provisioning works through a liquidity curve, which reflects the relationship between price and depth. Since we’re only interested in supplying liquidity within certain price ranges, we end up owning a specific section of the curve. This section is represented by an NFT and can be viewed after adding liquidity.

Below is an example of how it looks like in practice:

Notice that the “current price” is between the “Min price” and “Max price”, which means that the position is in range. The price moving outside of your range will result in your position no longer yielding trading fee income, given that your liquidity is not actively participating in the swaps.

It is therefore recommended to keep track of your positions or set yourself price alerts, so that you can adjust your positions.

Note: The NFT you receive is a unique representation of your ownership and should be kept savely.

V3 Liquidity Mining Launches in Early April!

Since the previously launched staking contracts are limited to token-based campaigns, it was required to work on new smart contracts that would allow for NFT-based liquidity mining.

The new system is ready and will be launched in early April. Closer instructions for the migration will be provided at that time. Please make sure to follow the Hydra news channel in order to not miss the migration, as well as other important news.

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HYDRA is a proof-of-stake blockchain optimized for real-world businesses. It tackles some of the most profound and challenging issues with existing blockchain economies and introduces a truly shared economy with fair treatment to all network participants.