How it Works
Auto-rebalancing of your concentrated liquidity.
Uniswap v3 achieves higher capital efficiency by allowing the liquidity provider to specify ranges (for example +/- 1 standard deviation (σ) of the current price), instead of the entire pricing curve between 0 and infinity where they want to concentrate their liquidity.
Let’s say Alice decides to use a standard bell curve to concentrate her liquidity. In Uniswap v3 she concentrates 68.3% of her capital within +/- 1 standard deviation, 95% within 2 σ and 100% within 3 σ from the current price. Her liquidity concentration would look something like this.
Now let’s say the price of Alice’s pair moves 1 σ away from her initial price. A couple of things would happen in this situation, which is highly likely in a non-stablecoin pair given cryptocurrencies high volatility:
• The highest capital concentration and most profitable portion of her capital (the 68.3% within +/- 1 σ) becomes inactive. This means the largest portion of Alice’s capital isn’t making money for her (it’s inactive until the price moves back within +/- 1 σ of her initial price).
• Alice gets “stopped-out” and receives the 68.3% of her capital within this range back to her in the form of the worse performing coin out of the pair
• Now Alice only has 13.6% of her initial capital working for her (the concentrated capital between 1 and 2 standard deviations
- At this point Alice needs to manually go into Uniswap v3 to a) adjust her ranges, and b) possibly add additional capital since she got stopped out of her first range
The solution: Lixir Finance
LIX automatically rebalances the concentration of Alice’s capital as price moves in either direction so:
• The highest capital concentration is always at current price to achieve highest capital efficiency and ROI
• Mitigate the risk of Alice’s highest concentration of capital from becoming inactive or being stopped-out
• Saves Alice time and energy manually making such changes for her, and the headache of calculating the new rages and concentration % using our proprietary algorithm.
You may ask what if Alice indeed wanted to set ranges where her capital becomes inactive and stopped out? In the next article we explore how LIX skews your capital concentration in one direction or the other to maximize ROI as price moves to the edges of your acceptable trading range limits.