Tick Composition Explained
In the last post, we covered the concept of a “tick,” the smallest functional unit within a CLAMM price range. One key takeaway is that a price range can be constructed by depositing equivalent liquidity across the underlying ticks within that range.
Using this logic, CLAMM positions are best discussed in terms of ticks (applicable generally to any pool, e.g., ETH/USDC) rather than price ranges, which are specific to individual LPs. Calculations for a single tick can simply be repeated for every tick within a specified range.
Understanding Composition
Liquidity in a tick facilitates swaps for trades occurring within the tick’s range. The composition refers to the combination of assets a tick holds, which depends on its relationship to the prevailing trading price.
For ETH/USDC, a tick may contain $ETH, $USDC, or a combination of both.
Composition of a Tick
In-Range Composition
When the price of $ETH is within a tick’s range, for example, $1,776.50 within the $1,775-$1,780 tick, the tick will contain both $ETH and $USDC.
As $ETH’s price increases within this range, the tick’s composition will include more $USDC as users swap it for $ETH. This means the composition of a tick will adjust as the price of $ETH changes.
Out-of-Range Composition
As the price of $ETH moves within a tick, its composition changes accordingly:
- Spot Price > Tick: If $ETH rises above the tick’s upper bound (e.g., $1,825, above the $1,775-$1,780 tick), the tick will be fully converted to $USDC as traders purchase $ETH.
- Spot Price < Tick: Conversely, if $ETH falls below the tick’s lower bound (e.g., $1,725, below $1,775-$1,780), the tick will consist entirely of $ETH.
Composition of a Range
A price range in a CLAMM is simply the aggregation of all individual ticks within the range. Therefore, the principles for a single tick apply across the range:
- Spot Price > Price Range: If the spot price exceeds the range’s upper bound, the position will be entirely in $USDC.
- Spot Price < Price Range: If the spot price is below the lower bound, the position will be entirely in $ETH.
- Spot Price Within Price Range: When the spot price is within the range, the composition will include both $ETH and $USDC, with each tick adjusting as described above.
Summary
This lesson covered the composition of a tick as it relates to the spot price:
- The composition of each tick depends on the relationship between spot price and tick boundaries.
- When the spot price is within the tick’s range, the tick contains both $ETH and $USDC.
- If the spot price is below the tick, the composition is 100% $ETH.
- If the spot price is above the tick, the composition is 100% $USDC.
- This logic applies across an entire price range by comparing each tick within that range to the spot price.
In our next article, we’ll dive into the concept of impermanent loss and explore its significance within CLAMMs.
About Stryke
Stryke is a decentralised options protocol that focuses on maximising liquidity and enhancing gains for option buyers while minimising losses for option writers—all in a passive approach.Stryke employs option pools that enable anyone to effortlessly earn yield. The protocol provides value to both option sellers and buyers by ensuring equitable and optimised prices for options at various strike prices and expiries, achieved through our proprietary, cutting-edge option pricing model designed to mirror volatility smiles.
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