Concentrated Liquidity: How ICHI Has $500k More Useable Liquidity Than Nearly Every Crypto Project
DeFi is facing a crisis. Behind almost every project is a crippling lack of liquidity. This is a massive problem as stable liquidity is needed to build a healthy decentralized economy. Without liquidity, projects and users cannot perform essential tasks like buying, selling or lending crypto.
The root of this ongoing liquidity shortage is that Liquidity Providers (LPs) lack the proper financial incentives to provide enough capital for the industry. As the system currently exists, many LPs actually lose money when they provide liquidity.
Two of the main reasons LPs incur losses when they lend include:
- Arbitrage Traders: Users who buy liquidity and sell it elsewhere for a profit
- Impermanent Loss: When a token prices change causing an LP’s deposit in a liquidity pool to be worth less than the value if they hadn’t deposited in the first place.
At ICHI, our innovative technology and products currently have ~10M that is supporting projects and providing users yield. We have been able to achieve this by building on top of the innovations Uniswap V3 achieved with concentrated liquidity.
Concentrated liquidity was a major improvement for LPs using Uniswap. Before concentrated liquidity existed, LPs deposited tokens in pools where their liquidity was distributed evenly along an x*y=k price curve. These assets were reserved for every price between zero and infinity. In most pools, this liquidity sat unused and therefore was wasted.
This was a capital inefficient process that led to high slippage costs for users and did not offer lucrative rewards to encourage enough deposits. Popular protocols like SushiSwap and Uniswap V2 used this design to build their liquidity pools. While these protocols enabled easy and direct decentralized trading between users via Automated Market Makers (AMMs,) it was not profitable enough to incentivize consistent deposits from LPs.
To help encourage LPs to deposit more, Uniswap V3 introduced liquidity concentration. Concentrated liquidity grants users granular control over the price range where they allocate their liquidity, helping to maximize the returns on capital for LPs. With Uniswap V2, much of the liquidity sat out of range because the parameters were from zero to infinity. Once V3 launched, LPs could construct individualized price curves to their trading preferences. Providers are able to create the same depth of liquidity that was present on V2 with much less capital, as they can individualize the ranges, freeing additional tokens for use. This creates a system that Uniswap claims to be up to 4000x as capital efficient as V2.
Despite improving this process, getting the most out of Uniswap V3 is extremely difficult. Since the price ranges are completely customized, LPs need to constantly manage positions at which they are providing liquidity. They need to ensure their funds remain within the active trading price in order to earn fees. What LPs gained in capital efficiency they have lost in the time needed to manage these positions. This is an incredibly complicated process that can actually increase the risks of impermanent loss.
Despite the improvements of Uniswap V3 over V2, there is still a glaring lack of liquidity in DeFi. LPs are still seeing losses when they provide capital, leading to ongoing crunches. On Uniswap, less than 25 project tokens currently have more than $50k in liquidity at +/- 2% price slippage. (ICHI has ~$500k). This lack of usable liquidity has stunted Web3 as value is not able to move as easily across the market to support growth.
Since the collapse of centralized exchange FTX, crypto is experiencing massive volatility. In the wake of this collapse, there is a huge opportunity for responsible and utilitarian DeFi projects to show the potential of the industry. However, for that to happen, DeFi needs stable liquidity. In order to secure that capital, we need to make the process of earning yield and rewards on deposits easier and more efficient. Concentrated liquidity introduced by Uniswap is a good start. The next step is to combine the capital efficiency of Uniswap V3 with a simple liquidity management protocol that allows for high returns without requiring constant management.
ICHI is working to address these problems in DeFi and enable any crypto project to establish deep, on-chain liquidity. By building on top of Uniswap V3, ICHI’s Vaults help LPs earn yield on any token without the time-consuming management process. With ICHI, projects can create sustainable liquidity at no cost while also providing yield to backers who participate as well as advisors and team members.
As we discussed earlier, this model is already helping to build a deep on-chain liquidity program. To build the future of DeFi where stable liquidity is possible, projects need to design liquidity programs that actually reward LPs. This is the goal at ICHI. You can read more about how Vaults work here: https://bit.ly/3f6apdQ
About ICHI
ICHI enables users to grow any token with low-slippage, on-chain liquidity. Learn more by visiting the ICHI website, Medium, Twitter, Telegram, or Discord.
