We are excited to announce that Parcl is integrating with Orca’s Whirlpools AMM program to provide the Parcl dex with concentrated liquidity pools. Concentrated liquidity produces the most competitive price execution and returns to LPs.
This is especially true for token pairs with well-known market dynamics, such as parcl/usdc pairs pegged to price feeds. Development is underway, and the Orca team has been incredibly helpful as we build with the Whirlpool SDK.
What is Concentrated Liquidity?
The Uniswap v3 protocol introduced concentrated liquidity in 2021. It takes the original constant product function AMM and lets liquidity providers allocate capital in specific price ranges.
Custom capital formation leads to material capital efficiency gains because LPs can choose to market-make where they believe there is demand for trading volume. This is unlike the canonical constant product function AMMs, which uniformly distribute all capital across the price curve.
Below you can see the difference between capital formation on a standard constant product AMM (left) and a concentrated liquidity AMM (right).
Concentrated liquidity is particularly useful to Parcl v1 because each parcl token minted from the protocol is price pegged to its respective parcl price feed (i.e., the peg).
We expect Parcl LPs to aggregate their parcl tokens in specific price ranges around the current parcl price feed to provide traders with the best price execution and maximize LP yields.
Below you can see extreme examples of the power of concentrated liquidity for USD stablecoin pairs on Uniswap v3.
On the left is the liquidity distribution graph for the FRAX/USDC pair and on the right is the liquidity distribution graph for the DAI/USDC pair. These pools concentrate hundreds of millions of USD value within very narrow ranges around a price of 1:1.
While we believe concentrated liquidity’s benefits far exceed any trade-offs, there is a key tradeoff relative to the standard constant product AMMs, which is that providing capital is a more active experience.
This is because LPs only earn fees if the current price of the AMM pool is within the price range they’ve chosen for their position. Depending on the pool’s volatility, frequent rebalancing may be necessary to continue to earn fees.
We expect many LPs to embrace the additional complexity as they do across chains and concentrated liquidity AMM implementations. Fortunately, real estate is a low volatility asset class, and Solana’s low fees allow active LPs to rebalance as needed with low gas costs.
Nonetheless, suppose any LPs prefer less complexity and a more passive experience. In that case, they will be able to deploy capital into automated ranges based on a specific pool’s current volatility profile, the current parcl price feed, and potentially a host of other factors for the best possible automated LPing experience.
Concentrated liquidity is a step-function improvement for Parcl traders and LPs. We’re excited for everyone to try it out in our second testnet later this month.