Astroport unleashes first passive concentrated liquidity (PCL) pool on Terra
- Astroport’s newest pool type should bring 2–3x better swap execution than any other Cosmos DEX and is now live on Terra mainnet
- Pools use dynamic fees to fight back against impermanent loss and toxic flow
- The PCL roll out is progressive starting with a single pool: ASTRO-LUNA
- New LPs can add assets to the ASTRO-LUNA PCL pool now and existing LPs in the pool can migrate from XYK to PCL on the pools page
- Additional constant product pools can be migrated in the coming days and weeks by governance
Astroport’s biggest and most significant upgrade since its inception has just brought passive concentrated liquidity pools (PCL) to the Cosmos. Now live on Terra mainnet, these pools use a special repegging algorithm to bring 2–3x better swap execution than any other Cosmos DEX.
PCL pools come with numerous benefits including:
- Better trade pricing than constant product (XYK) pools — even with shallower liquidity pools
- A “passive” LP’ing experience that doesn’t require ongoing, active management of your positions
- Full composability with pre-existing DeFi primitives
Let’s explore how they work and how they’re positioning Astroport to be the most efficient DEX in the Cosmos.
Introducing PCL pools
Pioneered by Curve, PCL pools on Ethereum regularly facilitate hundreds of millions of dollars in swaps every day. Like Astroport’s existing stableswap pools, which are the most efficient pools within Cosmos for stable assets, PCL pools algorithmically amplify liquidity around a specific price point.
There’s a profound difference between stableswap and PCL pools, though. Stableswap pools amplify liquidity around 1:1 pricing. That works great for LSD and stablecoin pairs, but what about tokens with unpegged, volatile prices?
By harnessing an advanced repegging algorithm, PCL pools automatically amplify liquidity around current market prices for any pair of tokens. Specifically, the algo looks at ongoing trades and rebalances liquidity and fees around the exponential moving average of those trades.
This moving average helps determine the specific price range around which to amplify trades. If prices move outside the range, the repegging algorithm automatically updates the price range.
That means the power of stableswap pools can now be applied to ANY pool on Terra. And traders will get better pricing — even on pools with significantly less depth.
The benefits of PCL pools
1. Capital Efficiency.
Constant product pools (CCPs) require extremely deep liquidity to ensure acceptable slippage on trades. By concentrating liquidity around a specific price, PCL pools need only a fraction of the depth of CPPs to offer superior execution.
2. Toxic flow mitigation.
Concentrating or amplifying liquidity is a double-edged sword. By amplifying liquidity around a specific price, it increases capital efficiency. However, it also amplifies the risk of impermanent loss and toxic flow (value extraction by arbitrageurs) for LPs during volatile periods when the prices of two tokens in a pool diverge.
Astroport’s PCL pools attempt to mitigate this risk by introducing dynamic fees. Instead of a fixed fee, fees automatically adjust higher or lower based on volatility. This means LPs receive larger rewards during times of volatility (i.e. when real prices most diverge from the exponential moving average).
With this approach, pool fees dynamically adjust based on market volatility — ranging between 5 basis points (0.05%) and 40 basis points (0.40%). In many ways, this approach is similar to traditional market making. Market makers widen their bid-ask spreads during volatility (effectively charging more on trades). PCL pools mimic this “upcharge” via automatically-adjusted fees, which aim to offset impermanent loss via fee income.
Data backs up this approach. A research report from Delphi Digital found that Curve v2’s PCL pools have have resulted in superior price execution for leading stablecoin swaps via the “Tricrypto” pool — even over Uniswap v3’s more actively-managed pools.
3. Passive LPing
Osmosis’s “supercharged liquidity” pools and Uniswap v3 pools take a different approach than PCL. Specifically, they give LPs more control by allowing them to manually set a specific price range where they’d like to deploy their liquidity. With Astroport’s PCL approach, the AMM instead automatically adjusts the acceptable price range based on the exponential moving average of the tokens in the pool.
While PCL gives LPs less granular control, it allows them to provide liquidity once and rest assured that their tokens still serve as active liquidity on the AMM. Supercharged liquidity and Uniswap v3, on the other hand, require LPs to adjust their price range manually if and when the price moves out of their pre-determined range. In other words, Astroport’s new approach prioritizes passive LP’ing over more active management.
They’re two different approaches for two different types of LPs. And PCL is now ready for swappers and LPs on Terra mainnet.
Using Astroport’s first PCL pool
Before today’s release, Astroport offered two pool types: constant product and stableswap. Since they’re 2–3x more efficient than constant product pools (CPPs), PCL pools will effectively replace CPPs as the de facto pools for tokens that do not trade at 1:1 prices.
This process will happen iteratively starting with the ASTRO-LUNA pool on Terra mainnet. New LPs can add assets to the ASTRO-LUNA PCL pool now on the Terra mainnet pools page on Astroport.fi. Existing LPs in the pool can migrate from XYK to PCL on the same page as shown below.
For other token pairs that already have constant product pools on Astroport, the Astral Assembly can elect to de-register those constant product pools and approve the creation of equivalent PCL pools. This process can be batched so that governance can upgrade multiple pools simultaneously. If and when an upgrade is approved, existing LPs in the affected pools will be able to migrate their liquidity to the new PCL pools.
If a pool currently receives ASTRO emissions, its allocation points should be assigned to the new PCL pool in the same governance proposal. If a pool receives dual rewards, third party protocols will need to migrate their rewards to the new PCL pool as well. The process for assigning rewards to a PCL pool is the same as it is for a constant product pool as documented here.
Until all liquidity is migrated from legacy pools to new PCL pools, some trades could get routed through either the constant product or PCL pools — or even both pools. LPs will continue to receive trading fees as long as trades utilize their liquidity.
Look for upcoming governance proposals aiming to migrate additional pools from constant product to PCL in the coming weeks. And follow Astroport on Twitter to get alerted as these proposals go live.
Transforming the Cosmos
Today’s launch radically transforms the Cosmos. Not only do PCL pools bring 2–3x better swap execution to the ecosystem, they ensure liquidity remains composable with other core DeFi primitives. It also allows LPs to deposit liquidity without requiring active management, and it opens the door to bringing PCL to other appchains in the Cosmos and beyond.
Astroport’s existing charts and analytics will help LPs analyze the performance of these new pools. As liquidity enters PCL pools, you’ll be able to visually track APRs, liquidity, volume and impermanent loss.
Explore APRs and all of Astroport’s available pool types at app.astroport.fi/pools. Then, stay tuned for upcoming governance proposals, which will aim to migrate liquidity from constant product to PCL pools. With them, the great liquidity migration will begin, and trading on Terra and beyond will be more efficient than ever before.
Remember, Terra, Injective, Neutron and Astroport are experimental technologies. This article does not constitute investment advice and is subject to and limited by the Astroport disclaimers, which you should review before interacting with the protocol.