Smart LP Smoothpaper
Introducing Smart LP
Today marks the launch of Smart LP - a set of automated concentrated liquidity strategies that provide a hands-free approach to managing V3 liquidity positions. This strategy suite is the ideal choice for retail traders, protocols, exchanges, or funds interested in concentrated liquidity who value simplicity and high performance.
We’ve made the process of providing V3 liquidity as approachable as possible, with a focus on transparency and optionality for the user, adaptable based on their desired outcomes.
Smart V3 will simplify your V3 liquidity experience.
Concentrated Liquidity, Made Simple
For most liquidity providers, effectively managing a range using V3 LP can be complex due to the need for a deep understanding of market dynamics, volatility, and price movements.
Retail traders may find it challenging to set the right parameters, while continuously monitoring & managing their positions, which can lead to higher impermanent loss or missed yield opportunities.
V3 liquidity management traditionally requires a level of expertise and active involvement that may be better suited for more experienced or institutional participants in the DeFi ecosystem. But today, we will show you how anyone can control liquidity.
A Volatility-Based Approach
Volatility is a fundamental aspect of any market. It not only affects crypto, but all traded assets across various classes. Volatility plays a crucial role in determining prices, and by measuring volatility over time we get closer to defining a market’s behavior.
From our research, we encountered the following:
- Volatility in crypto tends to be clustered and cyclical.
- Volatility in crypto has been trending down over time.
- After volatility settles on a cycle’s local bottom, it tends to spike up ~50%.
The cyclical nature of volatility goes hand-in-hand with the cyclical nature of market trends.
This data-driven approach can be used in several different applications:
- Risk Management
- Improving Trading Accuracy
- Determining Concentrated Liquidity Ranges
By examining volatility, it is possible to determine very efficient ranges in which you can provide liquidity.
Concentrated Liquidity's Fab Four
Currently, users don’t have enough optionality for CL strategies. With Smart LP, Jones will allow users to make choices based on their risk appetite.
Users will be able to choose from four main vault types:
- Range Assist Wide
- Range Assist Narrow
- Bull
- Bear
All vault types operate on an automatic rebalance method that triggers once price deviates from a target. The difference between the vaults really comes down to how liquidity is concentrated around the price.
Range Assist Wide
The Range Assist Wide vault type will allow users to access one of the most basic forms of concentrated liquidity strategies, similar to what they might be familiar with from liquidity managers in the past.
Liquidity ranges are concentrated evenly across the price of a token pair:
Since liquidity is spread wider than other strategies, yield will be relatively lower compared to something more narrow, but with a better impermanent loss outcome overtime.
Range Assist Narrow
The Range Assist Narrow strategy has the same basic construction as the Wide strategy, but with a narrower range of liquidity concentration.
The result of this translates to increased yield, but a greater chance to incur a rebalance event, which could mean more rebalances over time.
Bull
The Bull Strategy takes what we’ve learned from previous iterations of our now-deprecated Metavaults strategy and adds them to liquidity: position bias optionality.
Take a look at the example below of how liquidity will be concentrated in a typical ETH-USDC Bull strategy:
With this strategy, more liquidity will be provided for the volatile token of the pair, to take advantage of volatility events where the benefit is to the upside of token price appreciation.
In essence, the Bull Strategy is the optimal choice for users who want to participate in V3 strategies, but are afraid that they will miss out on the price appreciation of their favorite volatile token. This strategy will allow them to share in most of that price appreciation, while earning them incredibly performative yield during bull market scenarios.
Bear
You might think that the Bear strategy is then the inverse of the Bull, close but not quite my dear Jonesie.
The Bear strategy concentrates liquidity in the inverse fashion to the Bull strategy, but the outcome is not to benefit from downward volatility events:
Instead, the focus of the Bear strategy is to provide the maximum PROTECTION against downwards volatility while increasing yield in those instances.
Having a mix of Bull & Bear strategies can create some very interesting hedged scenarios for users. We can’t wait to see all of the creative ways that users, protocols, or funds will build on top of these novel concepts.
Yield Management
While optionality of strategy is surely a great quality of life feature, another very important one is the management of yield.
Let’s take a look at how you can manage your yield with Smart LP on a pair like ARB/ETH:
Option 1: Autocompounding - have yield constantly provided back into your position with no work on your part.
Option 2: Yield in 2 Tokens - Have the yield delivered to you in both of the tokens of the pair, in this case ARB and ETH.
Option 3: Yield in 1 Token - Have the yield delivered to you in just one token of the pair, in this case either ARB or ETH.
Through these methods, you can transform any LP position into something that produces the desired yield outcome for you.
You can use it to grow larger LP positions, de-risk your position over time into a token like ETH or USDC, and even accumulate more of the volatile token you love so much!
Volatile Pairs vs. Pegged & Stable Pairs
Many pairs that you will encounter out there in the wild will look something like: [x volatile token] - ETH or [x volatile token] - USDC.
But Jonesies, the liquidity landscape is vast and V3 architecture allows liquidity pairs such as those for stables or pegged assets to thrive. Leaving you the beneficiary of their high swap volume and relative consistency. Become the apex predator of the liquidity landscape.
Volatile pairs are important, but Smart V3 was built from the ground up to automate the experience of managing pegged or stable pairs, so anyone can share their merits.
Volatile Pairs
We outlined how a volatile token pair might look above: take Jones’ own pool as an example, JONES - WETH on Camelot V3.
Any token paired against a token that doesn’t share the same volatility profile, even blue-chips like ETH & BTC, can be classified as volatile pairs. By offering the strategy suite of Neutral Wide, Neutral Narrow, Bull, and Bear; we hope to provide the right strategy for every prospective liquidity provider.
However, as you’ll soon learn, pegged pairs & stable pairs are viewed differently by the Jeeniuses creating this strategy suite. They don’t share in the same breadth of optionality, but instead receive custom-tailored white glove treatment from steady Jones hands.
Cruise Control - Pegged & Stable Strategies
Is there a correlation between the rise of femboy devs and the popularity of pegged pairs? Maybe.
Regardless, pegged & stable pairs have become extremely popular with the addition of new products into crypto such as LRTs, yield-bearing stables, and new L1s or L2s with their own unique staked derivative tokens & stables. Typically, these pools are also among the largest and most heavily used on any given exchange as well, perfect setting for the optimal strategy.
This is where the Cruise Control Strategy comes into play. For pegged pairs, liquidity is concentrated into a smaller range; usually only a handful of ticks around the price. Since pegged strategies should in theory stay in lockstep, we simply let the market do what it does and keep liquidity in range.
However, pegged pairs are characterized by wicks created by outsized players entering & exiting meaningful positions relative to the amount of available liquidity. At the moment one of these meaningful exits or entries causes a breach of the price range, our strategy does not jump the gun to rebalance. Instead, we focus on the “fair” value of the pegged tokens against each other, and effectively rebalance only when our range is breached, paired with a significant change in this fair value.
To further improve this method, we utilize a median filter to read the price so that even though a small lag is introduced in rebalances, a huge amount of price noise is eliminated.
Stable pairs can be optimized with the same Cruise Control Strategy as pegged pairs, with the main difference that the fair value doesn’t change over time due to the stable nature of both tokens.
Use Concentrated Liquidity & Win
The plan is simple: don’t sit on the sidelines any longer, anxious that becoming a liquidity provider is too hard for you. It’s not, in fact you can start in just a few clicks and impress your family at the summer barbeque with your esoteric knowledge of crypto liquidity (just use a lot of the jargon we put in this paper).
This month, we will roll out LP strategies on some of your favorites AMMs: Camelot, Sushiswap, Ramses, Uniswap, Pancakeswap; for some of your favorite tokens: $ETH, $WBTC, $ARB, $PENDLE, $GMX, $LINK, $SOL, $DMT, $solvBTC, and so many more.
All you have to do is find our hat icon listed next to a pool on your favorite AMM, or navigate to the ‘Liquidity’ section of our dApp. Then you’ll be able to simply zap the preferred token of your choice into an LP strategy type of your choice and Jones does the rest.
No mechanical turks, no cookie cutter strategies; just organic, transparent yield.
No part of this article is to be interpreted as financial advice. We aren’t financial advisors and you should always do your own research.
Come join the Jones DAO community now to stay up to date on our upcoming releases and partnership announcements.
We’ll be hosting AMAs, previews, and sharing plenty of alpha: