Understanding Modes
Last updated
Last updated
Overview of the four Pool Modes accessible to Liquidity Providers
HyperLaunch offers four options to LP that could be regrouped into two categories for simplicity:
Mode Static: is similar to a UNIv3 liquidity providing across a custom range, with immensely more flexibility.
And three dynamic modes offer various flavors of rebalancing to LP to optimize further their earning:
Mode Right (follows price to the right)
Mode Left (follows price to the left)
Mode Both (follows price both ways)
Mode Static, a distinctive liquidity management approach introduced by HyperLaunch, empowers liquidity providers (LPs) with meticulous control over their liquidity distribution. In this mode, LPs establish an unchanging allocation of assets within a designated price range, upholding a fixed proportion regardless of market shifts.
This mode is particularly useful when LPs have a specific liquidity strategy in mind or want to maintain a constant allocation of assets within a certain price range. Since it doesn’t move liquidity to follow price, Mode Static is likely to be less capital efficient than the other Modes.
While other Mode AMMs enable liquidity providers to select a range for uniform liquidity distribution, Mode Static offers a distinct approach. Here, LPs gain the ability to finely adjust their distribution on a bin-by-bin basis, thus unlocking the potential for intricate liquidity strategies. Within this mode, LPs enjoy the flexibility to deploy liquidity utilizing three predefined configurations:
Exponential: “Gradual Spread”: most of the liquidity is bunched up close to the current pool price, and the rest is spread out across nearby price range bins, decreasing bit by bit.
Flat: “Even Spread”: liquidity is spread out evenly across different price ranges, centered on the current pool price, similar to how Uniswap v2 works.
Single Bin: “Single Spot Focus” means all the liquidity is put into one spot, the active price range. The Single Bin is like putting all your eggs in one basket, similar to Uniswap v3.
Mode Right operates as a dynamic range order that tracks the movement of the "base" asset's price on the liquidity graph, typically associated with an asset that is gaining value. For instance, in a pool like USDT/BTC, where BTC is the base asset, as the price of BTC rises due to increased demand and trading activity, the liquidity distribution automatically shifts to reflect this change.
In practical terms, a LP utilizing Mode Right adds liquidity primarily to the bin left of the active bin, anticipating price movement to the right. As the price of the base asset (e.g., BTC) increases and surpasses the current active bin, the AMM readjusts the LP's liquidity distribution one bin to the right, ensuring alignment with the price trend.
By strategically concentrating liquidity near the active bin's left side, LPs can capture trading fees while mitigating potential impermanent loss, particularly when they hold a bullish outlook for a specific asset. However, Mode Right does not guarantee returns and requires LPs to conduct their own research and assessment of market trends.
It's important to note that Mode Right operates unidirectionally, exclusively tracking price movement to the right. In cases where market dynamics cause the price to trend leftwards, the AMM will maintain the LP's existing liquidity distribution, potentially exposing them to impermanent loss with the underperforming asset.
In summary, Mode Right serves as a tool for LPs to dynamically capitalize on upward price movement of the base asset, offering the potential for fee generation while allowing LPs to maintain a carefully managed liquidity position aligned with their market outlook.
Mode Left acts as a dynamic range order that aligns with a pool's price movement when it shifts to the left on the liquidity graph. This leftward movement corresponds to a decrease in the price of the "base" asset due to trading activity, typically driven by decreased demand. Just as Mode Right caters to upward trends, Mode Left caters to downward trends in the market.
In Mode Left, LPs can position liquidity in a bin situated immediately to the right of the current active bin. This approach anticipates that the "base" asset will decline in comparison to the "quote" asset, resulting in a leftward price trend. By effectively tracking this leftward movement, LPs can capitalize on market volatility while managing impermanent loss.
For instance, imagine an LP participating in a USDT/BTC pool who foresees an impending bear market for BTC. By opting for Mode Left, they allocate BTC to the bin adjacent to the current active bin. If their prediction holds true and BTC's value decreases, traders swapping BTC for USDT will prompt the AMM to shift the price to the left. This change triggers an automatic reconcentration of the LP's BTC into the newly active bin, positioned to the right.
As the price fluctuates between the newly activated bin and the adjacent one, the LP accrues fees from the swaps. This process continues as long as the price remains within the designated range or continues moving to the left.
Just like Mode Right, Mode Left is a one-directional strategy. If the price shifts to the right, the AMM maintains the LP's bin configuration, potentially exposing them to impermanent loss if the leftward trend continues. It's important to emphasize that these modes serve as tools to facilitate LP strategies based on individual assessments of market conditions.
Mode Both serves as the versatile choice that allows liquidity to flexibly respond to price shifts, whẹther they trend upwards or downwards. LPs can distribute liquidity to both the active price range and its adjacent counterparts. As the price fluctuates, Mode Both intelligently readjusts liquidity to maintain its alignment with the prevailing price.
In Mode Both, an LP can allocate liquidity to the current active bin and the bins immediately to its left or right. If trading activities push the price from the active bin into a new bin on either side, the AMM automatically repositions the LP's liquidity from the opposite side into what was previously the active bin. This process aims to ensure a consistent presence of liquidity close to the pool price.
For instance, consider a USDT/BTC pool where an LP employs Mode Both, focusing their liquidity in the bin adjacent to the current active bin, predominantly composed of USDT. As the market value of BTC increases, traders exchange BTC for USDT, shifting the price rightward into the next bin full of BTC. The AMM then repositions the LP's liquidity into the bin immediately to the left of the active bin, predominantly consisting of USDT. This scenario mirrors the functionality of Mode Right.
Should the price persistently move in the same direction, the AMM continues to adjust the LP's liquidity to follow it. If the price reverses its trend, the AMM first allows the LP's liquidity to be swapped entirely before repositioning it to align with the opposite price movement. This mechanism aims to maintain the LP's liquidity proximity to the current price.
Continuing our example, suppose the price trend reverses, causing the value of BTC to decline. Trading activity shifts the price leftward, moving from the active bin into the bin directly to its left, now composed of USDT—the LP's current active bin. As the price further falls, it moves through the active bin, exchanging all USDT for BTC and entering the bin on the left. The LP's position is now focused on the bin just to the right of the active bin, fully comprised of BTC. Should the price continue to the left, the AMM adjusts the LP's BTC liquidity to align with the new active bin.
Mode Both aims to maximize fee collection by keeping the LP's liquidity closely tied to the price. Whenever the price traverses a bin where the LP has liquidity, fees are collected. However, it's important to note that Mode Both carries higher impermanent loss risk than Mode Right or Mode Left. The LP is exposed to impermanent loss in both price directions, along with the risk of "permanent loss" by implicitly agreeing to sell underperforming assets. Therefore, users should exercise caution and consider the associated risks before utilizing Mode Both.
