Concentrated Liquidity and Mean-zero IL

How do we achieve concentrated liquidity (mirror 3x Binance? how?)?

"Liquidity" combines 2 distinct concepts:

  • Depth: Orderbook depth, AMM shape etc. the determinant of slippage.

  • Capital: the actual amount of LP money in the Orderbook or AMM.

Conceptually, $10mil and $200mil of Capital can create the same Depth. The difference is that, the $10mil pool of capital may run out faster as more trade flows come in one direction.

At Integral, we mirror the Depth of max(3x Binance, 1x Uniswap). To do that, all we need is information: we just need to know what their Orderbook or AMM curve looks like.

Our LPs supply the Capital, according to the Depth of max(3x Binance, 1x Uniswap).

Technically, our innovation here is to de-couple Depth and Capital in our AMM design, so that we can achieve the same Depth with much less Capital. And this is called "concentrated liquidity".

For a more detailed explanation, be sure to check out:

  • Our note which explains the de-coupling idea.

  • Our paper which explains the properties of concentrated liquidity.

How do we achieve Mean-zero IL?

Impermanent Loss should really be renamed to Pool Leak.

  • A Pool Leak happens when the entire pool loses money to sure-profit traders like arbitrageurs and frontrunners.

  • Here's your common IL experience: Let's say you deposit in a ETH-USDC pool. When ETH goes up, you will for sure have less ETH (there is no randomness here, you are guaranteed to lose). Where did the sure profits go? To those sure-profit traders.

  • It's senseless to pretend that this is not just a Pool Leak, and wrap it in some marketing term like "impermanent".

    • The rationale for naming this pool leak as "impermanent" is the factual statement that, if ETH price reverts back to the starting point, you will get your missing ETHs back.

    • But this presentation is completely misleading because it's as if: you lose the girl when she's popular, and you get her back when she gets dumped. So she's your "Impermanent Girlfriend"? Who would want that!? The proper way to do this is to prevent her from being stolen from you in the first place.

Alright, with the Impermanent Girlfriend analogy setup, and we agree that the proper way to do this is to prevent her from being stolen from you in the first place. How do we do that? How do we prevent Pool Leak from happening in the first place and never have to think about "impermanent loss" again?

With trade delay of course!