Focused Liquidity

Introducing Focused Liquidity on OtterHome

OtterHome is an innovative decentralized finance (DeFi) project that aims to provide a simple, efficient swap experience for traders and liquidity providers. One way OtterHome is achieving this goal is through focused liquidity, which allows liquidity providers to concentrate their liquidity within a specific price range.

Traditionally, liquidity in AMM protocols like Uniswap and Joe-V1 is distributed uniformly across the entire price range. However, this can result in unused liquidity outside of a narrow trading range, leading to lower capital efficiency. OtterHome's Concentrated Liquidity solves this problem by enabling liquidity providers to choose a specific price range for their liquidity provision, resulting in higher capital efficiency.

Bin Pricing on OtterHome's Liquidity Book

To enable focused liquidity, OtterHome uses a unique pricing mechanism called bin pricing on its Liquidity Book. Liquidity is distributed across discrete bins with fixed widths, allowing liquidity to be exchanged at a fixed price within each bin. Each bin represents a single price point, and the difference between two consecutive bins is the bin step, a configurable parameter set by the pool creator.

For example, let's consider the USDC/USDT pair. If the current price is $1 and the bin step is set to 1 basis point (i.e. 0.0001 or 0.01%), then the next consecutive bins up are 1 * 1.0001 = $1.0001, 1.0001 * 1.0001 = $1.00020001, and so on. Liquidity pools or markets in OtterHome's Liquidity Book are uniquely identified by the tuple (X, Y, s) of pooled assets X, Y, and bin step s.

OtterHome's Liquidity Book vs. Uniswap V3

While Uniswap V3 also concentrates liquidity within a fixed bound, it uses a continuous X * Y = k curve. In contrast, OtterHome's Liquidity Book discretizes liquidity into fixed-width bins, with fixed price X + Y = k within each bin. In summary, Uniswap V3 uses a constant product between ticks, while OtterHome's Liquidity Book uses a constant sum within bins.

By enabling focused liquidity, OtterHome's Liquidity Book can improve capital efficiency and provide a better trading experience for both traders and liquidity providers.