DeFi & Options
CLAMM Series 2: Price Ranges Explained
Named after the CEO’s new found obsession with absolutely blasting it 🏌️♀️
In our first article, we briefly covered CLAMMs that will transform into option liquidity via Dopex v2.
To understand how this is possible, let’s take a look at our first CLAMM mechanic - the so-called “price range”
What is a price range?
When a user deposits CLAMM liquidity, they designate a ‘price range’ for which they allow their liquidity to be used.
Shown below is a user (Position 1) who has deposited ETH/USDC liquidity in the $1,600-1,900 price range.
Pictured here is a CLAMM position (Position 2) with the same amount deposited but in a narrower price range ($1,700-1,800).
As you may have been clever enough to notice, price ranges are entirely customizable based on the LPs preferences.
Preference for what, I hear you ask?
As usual It all comes down the shekels, my dear non-MBA B.Comm holder.
Allow me to explain.
A CLAMM position is said to be in range if the price of an asset, let’s say $1,775, falls within an LP’s price range. LPs only earn trading fees from swaps for their portion of liquidity which is in-range.
For Position 1, since $1,775 is within their price range they are said to be in-range.
For Position 2, since $1,775 is within their price range, they are also said to be in-range.
Since both positions are in-range, both positions are currently earning fees from trading.
However, since Position 2 has a tighter range, their liquidity is more concentrated than Position 1.
This means Position 2 earns more fees from trading activity since more of their liquidity is in-range!
For Position 1, a price lower than $1,600 or greater than $1,900 would push the position out of range.
For Position 2, a price lower than 1,700 or greater than $1,800 would push the position out of range.
If we take a spot price of $1,850, we can see that Position 1 will be in-range while Position 2 is out-of-range.
Thus, while Position 2 earns more trading fees than Position 1 while in-range, a smaller change in the spot price is needed to push them out-of-range where they will no longer earn fees!
Hopefully this has been a nice little introduction to CLAMM LPs.
To summarize our key points:
- CLAMM LPs can choose a price range
- CLAMM LPs only earn fees for swaps occurring on in-range liquidity (i.e. out-of-range liquidity does NOT earn fees)
- CLAMM LPs can choose tighter ranges to concentrate their liquidity
- CLAMM LPs can choose broader ranges to reduce the likelihood of their position being pushed out-of-range
Next article we cover the fundamental unit of a price-range - the so-called “tick”.
Until next time, my beloved readers.
Dopex is a decentralized options protocol that aims to maximize liquidity, minimize losses for option writers and maximize gains for option buyers — all in a passive manner. Dopex uses option pools to allow anyone to earn a yield passively. Offering value to both option sellers and buyers by ensuring fair and optimized option prices across all strike prices and expiries. This is thanks to our own innovative and state-of-the-art option pricing model that replicates volatility smiles.
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