CLAMM Series 2: Price Ranges Explained

CLAMM Series 2: Price Ranges Explained

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CLAMM Series 2: Understanding Price Ranges

In our previous discussion we introduced CLAMMs and explored some of its capabilities. Now, let’s delve deeper into what a price range entails and its significance.

What is a Price Range?

A price range in 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 dictates 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 the swaps conducted within this range. For instance:

  • Position 1: Deposited ETH/USDC within $1,600-1,900 range. This position is in-range and earning fees when the price is $1,775.
  • Position 2: Deposited ETH/USDC 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: Becomes out-of-range if the price drops below $1,600 or rises above $1,900.
  • Position 2: Out-of-range if the price falls below $1,700 or exceeds $1,800. Despite the potential for higher fees, Position 2 is more susceptible to falling out-of-range due to the narrower price limits.

Closing Comments

This discussion highlights the strategic importance of setting appropriate price ranges in CLAMMs:

  1. LPs choose their price range based on risk tolerance and expected market movements.
  2. Only in-range liquidity earns fees, emphasizing the need for strategic range placement.
  3. Narrower ranges can concentrate liquidity and increase fee potential but risk falling out-of-range more frequently.
  4. 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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