On August 22, 2022, decentralized exchange Trader Joe launched its v2. It is called Liquidity Book, and it promises traders the option to provide liquidity for a specific price range. Another perk is compensation in the form of higher trading fees when there is high price volatility. Both help with offsetting the risk of impermanent loss. It’s clear that Trader Joe has taken a good look at Uniswap v3 and tried to improve on it.
About Trader Joe
Trader Joe is a multi-functional defi platform that includes services like an NFT marketplace. Its decentralized exchange (dex), which is the topic of this article, is in the top 20 dexes. Since its launch on Avalanche in July 2021, it has generated a trading volume of more than $88 billion. Trading fees are paid to both liquidity providers and JOE token holders.
However, Trader Joe found that its v1 design caused its users capital inefficiency and impermanent loss. The v2 is a response to this.
Introducing Concentrated Liquidity: Providing liquidity in a price range
Concentrated liquidity was introduced by Uniswap v3. It allowed liquidity providers (LPs) to take positions in a certain price range for a trading pair. This increases the efficiency with which LPs can deploy (and risk) their capital. It allows them to deploy refined strategies as opposed to just dumping their coins in a pool and hoping for the best.
Like Uniswap v1, Joe v1 was built on the popular x*y=k Automated Market Maker (AMM) design. And following in the footsteps of Uniswap’s introduction of concentrated liquidity in v3, TraderJoe comes with a similar architecture. In Liquidity Book, liquidity is separated into distinct price ranges or ‘bins’. This is analogous to Uniswap v3’s Ticks. (I wonder why Trader Joe didn’t call these bins ‘pages’, to stay in the book metaphor?).
Example of Trading in Bins
Let’s compare trading between the first and current version of Trader Joe.
- Joe v1: A LP can deposit liquidity into the USDC/ETH pool and the liquidity will be spread over $0 to infinity price range.
- Joe v2: LP’s can set a price range of 1600 to 1700 USDC per Ether in the USDC-ETH pool. The liquidity they provide will only accrue trading fees as long as Ether trades in that range.
The most eye-catching benefit? In v2, the fees will be higher than in v1, where the price range is infinite. According to Joe’s explanation of Liquidity Book, ‘Concentrated Liquidity leads to traders getting considerably better prices with reduced or even zero price impact, even in pairs with relatively low TVL.’
Traders who want to benefit from high fees and who whave conviction in a certain price range can deposit all their tokens into one range, or ‘bin’. Others will opt for a more balanced approach. Depending on their view of the market, they can pick any amount of specific bins, and deposit any amount of liquidity into those bins.
Another benefit that Trader Joe claims the bin structure provides, is reduced or even zero price impact (slippage) of trades, even in trading pairs with small pools. Joe claims that this makes it stand out above Uniswap v3, in which slippage can still occur.
The Difference with Uniswap v3: Adjusting positions in one transaction
TraderJoe’s core team has apparently had a good look at what could be improved on Uniswap’s v3. They…
Erik started as a freelance writer around the time Satoshi was brewing on the whitepaper.
As a crypto investor, he is class of 2020. More of a holder than a trader, but never shy to experiment with new protocols.
