Before we get started, this is not a recommendation or endorsement to buy any token(s) mentioned.
Anyone who’s ever provided liquidity to an AMM in DeFi knows the pain of what’s referred to as impermanent loss (IL). Put simply, IL is the loss from holding a balance of tokens in an LP versus simply holding the tokens without the LP. It is commonly used in estimating the profitability of providing liquidity to AMMs. LPs supply a balance of assets that are very likely to change over time, and depending on how volatile the market is, that IL can be extreme. For example, if an LP holds a 50/50 ratio of ETH/DAI, as ETH goes up in price, LPs are selling ETH to traders and swapping for DAI, but during a downtrend, LPs are buying ETH and selling DAI to traders.
It is always possible that the value of the LP position will return to where it started but there’s no guarantee. When Uniswap V3 launched, it was a major innovation in design for AMMs allowing LPs to place liquidity within specified price ranges vs providing liquidity across an infinite price band, thus allowing the AMM to be more capital efficient but also potentially subjecting LPs to even more IL within tighter price bands.
Maverick Protocol has launched a new AMM protocol to maximize capital efficiency by automating the concentration of liquidity as price moves. Maverick claims to be the first Dynamic Distribution AMM capable of automating liquidity strategies. In layman’s terms, Maverick provides an AMM with built-in liquidity strategies to move the LP’s liquidity as the price of pool tokens change, in order to keep the liquidity actively earning fees.
Higher capital efficiency leads to more liquid markets, which means better prices for traders and more fees for liquidity providers. Maverick helps LPs to avoid high gas fees required to adjust positions themselves. Instead LPs can choose to follow the price of an asset in a single direction, betting on where the price of a token might go. These directional LPs are similar to single-sided liquidity strategies, where LPs are mostly exposed to a single asset. Check out the example below of a liquidity strategy ideal for a bull market, where LPs are betting on the price of a token moving up over time, where a dynamic range order follows the price in a pool if and when it moves to the right on the liquidity graph.
With Maverick, there are 4 liquidity modes to choose from:
- Mode Right – for bull markets
- Mode Left – for bear markets
- Mode Both – for either bull or bear but higher risk of IL
- Mode Static – for ranging/flat markets, similar to any other AMM
Each mode is designed to enable a particular kind of liquidity strategy, with the first three all relying on Maverick AMM’s intelligent liquidity-shifting technology to keep your liquidity active according to certain parameters.
Like other AMMs, LPs supply liquidity to a pool on Maverick and receive trading fees charged to traders for each of their swaps. Each pool consists of 2 tokens. In general, an LP supplies quantities of both tokens, although in some cases they may provide only one and the ratio of the tokens depends on the distribution the LP selects.
- Liquidity is distributed using a series of bins that correspond to different price ranges in a pool (see picture below).
- Prices in a pool are a reflection of the…
DeFi Dad is one of the earliest power users of DeFi, having worked with early Ethereum startups going back to 2018, including Zapper.
