Concentrated Liquidity

Introduction

The cornerstone of Plenty V3 is Concentrated Liquidity: a revolutionary approach that allows liquidity providers to allocate their capital within a specific price range. Unlike traditional models where liquidity is spread uniformly across an infinite price curve, Plenty V3 optimizes the use of capital.

In traditional pools, much of the liquidity remains untouched. Plenty V3 allows liquidity providers to focus their capital on specific price ranges. This results in deeper liquidity at those ranges, enabling traders to get better rates and liquidity providers to earn more fees. We refer to this as a "position," and providers can have multiple positions per pool.

Active Liquidity

In Plenty V3, liquidity becomes "active" or "inactive" based on the asset's price movement in relation to the set price range of a position. When the asset price moves out of the position's range, the liquidity becomes inactive and stops earning fees.

This dynamic nature of liquidity allows for a more efficient market, as liquidity providers are incentivized to keep their liquidity active. They can do so by setting multiple positions at different price intervals, thereby letting the market naturally determine the most efficient distribution of liquidity.

Ticks

To facilitate concentrated liquidity, Plenty V3 introduces the concept of "ticks," which serve as the boundaries for each price range. A tick represents a ~0.005% change in price, and liquidity providers must choose the upper and lower ticks for their position.

The smart contract for the pool will continuously swap assets within the current tick range until the next tick is reached, at which point any dormant liquidity within the new tick range becomes active.

Tick spacing is directly related to the swap fee, allowing for a more flexible and efficient liquidity provision.