Automated Market Makers (AMMs) have revolutionized the way we trade cryptocurrencies by enabling decentralized and trustless exchanges. Uniswap, one of the most popular AMMs, introduced a new feature in its third version that allows liquidity providers (LPs) to concentrate their capital to smaller price intervals than the entire price range of an asset pair. This concept called concentrated liquidity, enables higher liquidity and rewards for LPs. However, it also introduced a new issue: LPs need to regularly modify their liquidity position to follow the market price when it goes out of the defined bounds.
Dusa, an AMM on the Massa Blockchain, has introduced a new concept to solve this issue: Autonomous Liquidity. In this article, we will explore what Autonomous Liquidity is, how it works, and its potential benefits for traders and LPs.
Concentrated Liquidity on Uniswap v3
Before diving into Autonomous Liquidity, let’s briefly review concentrated liquidity on Uniswap v3. In previous versions of Uniswap, LPs had a uniform distribution of their liquidity across the entire price interval (0, +∞), allowing trading across the entire range without any loss of liquidity. However, the majority of the liquidity was often never used, leading to inefficient use of capital.
Uniswap v3 introduced a new feature that allows LPs to concentrate their capital to smaller price intervals than (0, +∞). For example, in a stablecoin/stablecoin pair, an LP may choose to allocate capital solely to the 0.99–1.01 range. This results in deeper liquidity around the mid-price, and LPs earn more trading fees with their capital. LPs may have many different positions per pool, creating individualized price curves that reflect the preferences of each LP.
However, as the price of an asset rises or falls, it may exit the price bounds that LPs have set in a position. When the price exits a position’s interval, the position’s liquidity is no longer active and no longer earns fees. If the price ever reenters the interval, the liquidity becomes active again, and in-range LPs begin earning fees once more.
If you want to learn more about concentrated liquidity, you can have a look at Uniswap’s documentation: https://docs.uniswap.org/concepts/protocol/concentrated-liquidity
The issues
One of the main issues with concentrated liquidity provision is the lack of active management by liquidity providers, as it requires regular monitoring to remain effective, which can be time-consuming and difficult for less experienced users. LPs sometimes forget to update their liquidity concentration, which leads to null rewards for the provider, and lower liquidity at the asset’s current price. As a result, most LPs are now professionals since other users have abandoned this model as too complex to use.
The biggest suppliers generally use bots to monitor their concentration range, which leads to centralization, a subject we already discussed in our previous article: https://medium.com/@dusalabs/why-defi-is-not-currently-100-decentralized-eb4f9bcda7aa.
Overall, these issues can lead to inefficiencies, reduced market liquidity, and centralization.
Dusa Protocol’s Implementation
Dusa Protocol has taken the concept of concentrated liquidity a step further by introducing Autonomous Liquidity. Instead of LPs having to regularly modify their liquidity position (manually or by using bots) to follow the market price, Autonomous Liquidity uses Autonomous Smart Contracts on the Massa Blockchain to do this job at the protocol level. Autonomous Smart Contracts introduce self wake-up capabilities to smart contracts, allowing them to perform arbitrary operations when specific exchange rate targets of an LP pool are met.
By using Autonomous Smart Contracts, Dusa Protocol eliminates the need for LPs to constantly monitor and adjust their liquidity positions. This brings the tools that were previously restricted to professional suppliers, such as monitoring bots, to anyone, in an improved way as it is built at the protocol level.
Although autonomous liquidity will be available to anyone, it is an optional feature. LPs can still provide liquidity on Dusa Protocol as they would do on most AMMs, or even build their own liquidity providing strategies!
Benefits of Autonomous Liquidity
Autonomous Liquidity brings several benefits for traders and LPs in addition to the several ones of concentrated liquidity introduced by Uniswap v3:
- Provide & relax:
LPs don’t need to worry about having to replace their liquidity when the price moves out of the specified bounds, as the Autonomous Smart Contracts will automatically adjust their liquidity position. - Reduces risks:
Autonomous Liquidity limits the risks of relying on a bot to detect price changes, which are centralized points and failure points. With Autonomous Smart Contracts at the protocol level, LPs can be assured that their liquidity will always be trustlessly adjusted to market conditions without any human intervention. - Increases P&L:
By making this tool available to any user, it will largely increase liquidity around the current price of the assets, reducing volatility for traders and increasing P&L (profit & loss) for the LP.
Drawbacks
While Autonomous Liquidity has many advantages, it’s important to note that it may not be suitable for all use cases. For instance, it may not be the best solution for assets with particularly high volatility, as the protocol would have to often recenter the liquidity, leading to high gas consumption.
It’s important to consider the characteristics of the assets and the trading environment before deciding to use Autonomous Liquidity. However, for assets with moderate volatility and sufficient trading volume, Autonomous Liquidity can provide a significant improvement in capital efficiency and a more user-friendly liquidity provision experience.
The introduction of Autonomous Liquidity, such as the implementation by Dusa Protocol, has the potential to significantly impact market liquidity. By allowing any liquidity providers to concentrate their capital on smaller price intervals, Autonomous Liquidity can increase the liquidity available at key price points, providing greater trading opportunities and improving overall market efficiency.
