Liquidity Optimisation

This page was drafted in December 2020 and is currently due for an update. The core concepts are implemented as planned and the only difference is the formula used to plot the curve: y = kp/(x+k)

Maximisation of Liquidity

The discount/premium model applied whenever the pool enters a Deficit or Surplus state encourages arbitrageurs to trade in the direction that assists in re-balancing the pool. The degree of premium or discount applied is calculated exponentially based on the intensity of deviation from the initial staked amount. This means that a larger deviation would result in a larger difference between the Internal Price and the External Price, which would therefore create greater incentives for arbitrageurs to correct the prices and by extension, the Surplus or Deficit of assets in the pool.

A large emphasis is placed on re-balancing the pool to provide better rates for traders. As seen in the graph above, the shaded area ("Liquidity Maximisation") where the Current Balance is close to the Target Balance provides greatly reduces trade slippage and the Internal Price is similar to the External Price.

Effective profit taking for arbitrageurs would entail optimising the trade volume such that the net result of the trade would cause the Current Balance of the pool to be exactly the same as the Target Balance. When taking this into consideration with the Liquidity Maximization above, the risks and impact of impermanent loss is greatly reduced as both traders and arbitrageurs are systemically incentivised to re-balance each pool. Additionally, because the calculation of the Internal Price of any token is derived from its External Price, impermanent loss due to significant price fluctuations are mitigated.