Let’s Discuss Price Ranges
In our previous discussion, we introduced CLAMMs and explored some of their capabilities. Now, let’s delve deeper into what a price range entails and its significance.
What is a Price Range?
A price range in a CLAMM allows liquidity providers (LPs) to designate a specific price interval within which their liquidity can be utilised. For example, an LP may set a price range of $1,600 to $1,900 for their ETH/USDC liquidity. This range determines where their funds are active and earning trading fees.
In-Range Liquidity
Liquidity is considered "in-range" when the market price of an asset, such as $1,775, falls within the set price range. In this state, LPs earn trading fees from swaps conducted within this range. For instance:
- Position 1: Deposits in the ETH/USDC pool within the $1,600-$1,900 range. This position is in-range and earning fees when the price is $1,775.
- Position 2: Deposits within a narrower range of $1,700-$1,800. This concentrated approach allows Position 2 to potentially earn more fees due to higher liquidity concentration within a smaller price window.
Out-of-Range Liquidity
When market prices move outside the designated price range, the position becomes "out-of-range," and no trading fees are accrued. For example:
- Position 1: Moves out-of-range if the price drops below $1,600 or rises above $1,900.
- Position 2: Moves out-of-range if the price falls below $1,700 or exceeds $1,800. Although narrower ranges may yield higher fees, they risk going out-of-range more frequently.
Closing Comments
This discussion highlights the strategic importance of setting appropriate price ranges in CLAMMs:
- LPs choose their price range based on risk tolerance and expected market movements.
- Only in-range liquidity earns fees, emphasising the need for strategic range placement.
- Narrower ranges concentrate liquidity and increase fee potential but risk falling out-of-range more frequently.
- Broader ranges offer more stability but potentially lower fee earnings.
Next, we will explore the fundamental unit of a price range—the "tick." Stay tuned for deeper insights into how ticks influence CLAMM positions.
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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