DEX protocols have become an important aspect of the decentralized finance (DeFi) ecosystem, where liquidity and liquidity providers play a critical role in keeping the rapidly expanding space moving.
Despite the fact that DEX protocols have witnessed billions in daily trade activity, the liquidity market is gradually shifting away from traditional liquidity techniques and toward concentrated liquidity. Previously, liquidity was dispersed equally along the price curve between zero and infinity, but now it is assigned within a specified price range.
In the case of a stablecoin/stablecoin pair, for example, a liquidity provider (LP) may elect to allocate all capital to the $0.99 – $1.01 range. Traders will have more liquidity near the midpoint, and LPs will earn higher trading fees with their cash as a result.
By correcting for the flaws of the original formula, the focused liquidity formula strives to improve capital efficiency. In the new approach, liquidity can now be assigned to a price interval, resulting in a concentrated liquidity position. LPs can open as many positions as they like in the pool, allowing them to tailor their own price curves to their specific needs and tastes.
Algebra, a DEX with concentrated liquidity integration, has entered the contest
With the transition to V3 in May of last year, Uniswap switched to focused liquidity and has already seen a 500% increase in daily volume. In a similar vein, Algebra, a DEX with concentrated liquidity integration, has entered the contest.
On the one side, Uniswap is built on Ethereum, whereas Algebra is built on Polygon. With dynamic pricing, built-in farming, and support for cross-chain connection, the new DEX claims to be more efficient.
Alexandra Korneva, a co-founder of the DEX, claimed the following regarding Algebra’s primary benefits versus Uniswap:
“Because Uniswap lacks on-platform farming, users must rely on external smart contracts to farm tokens. Algebra has included built-in farming to help alleviate this problem by allowing users can send their spare tokens to pools and earn incentives. To farm and profit, you don’t need to use third-party platforms.”
Not only on Ethereum, but also on Solana and Binance Smart Chain, concentrated liquidity pools appear to be the latest trend among DEX players.