Understanding Concentrated Liquidity in the Genius DEX

 

Genius Yield is building a concentrated liquidity order-book decentralized exchange called the Genius DEX. The Smart Liquidity Vault, an AI-powered Yield Optimizer, will be built on top of the Genius DEX, allowing users to automate and maximize their yield strategies. All this is possible because the Genius DEX is designed to work in synergy with Cardano’s unique architecture, mainly its EUTxO smart contract paradigm.

After Uniswap’s ground-breaking launch in November 2018 popularizing the Automated Market Maker (AMM) model, their release of concentrated liquidity in Uniswap v3 allowed for more research and eventual integration in non-AMM systems with the express goal of improving capital efficiency.

The Genius DEX is completely different from AMM DEXes like Uniswap, and Genius Labs — the research and development team behind Genius Yield — is maximizing the benefits of concentrated liquidity, Smart Swaps, and other features to benefit traders and the Cardano ecosystem. Apart from drastically enhancing user experience by allowing them to utilize complicated investing strategies with our easy-to-use interface, the Genius DEX completely eliminates impermanent loss (IL) and uses concentrated liquidity to increase capital efficiency for liquidity providers (LPs) — a feature that also increases the exchange’s liquidity depth.

 

The Genius DEX: Smart Order Routers (SORs) and Smart Swaps

To appreciate how concentrated liquidity works, one must first understand how the Genius DEX operates.

In Genius DEX, traders can initiate simple swaps executed by programmable logic and processed by smart contracts via Smart Order Routers (SORs) — off-chain bots that scan the Cardano ledger for open orders and match them based on their specified conditions as initiated by the trader. Orders include common order-book types such as market and limit orders, and more complex types such as Dynamic and Algorithmic orders enabled by Smart Swaps, whose execution is automated based on defined programmable logic.

Typically, all orders, including those executed from Smart Swaps, “take” liquidity away from the exchange. These represent the demand side of the exchange, taking volume from the order book. On the other hand, liquidity providers add volume, deepening the DEX’s liquidity and allowing the exchange to function. A liquidity provider helps stabilize price action — reducing volatility — thus reducing slippage by quoting both sides of the buy and sell orders, ensuring efficient price discovery in a decentralized environment. Although liquidity provision styles can vary — for example in Uniswap v2 and Genius DEX, all are managed by smart contracts.

 

Concentrated Liquidity in the Genius DEX

Genius DEX allows liquidity providers to allocate — or concentrate — liquidity in a specific price range. Concentrating liquidity in this manner translates to high capital efficiency and yield opportunities since, unlike other price curves, liquidity providers’ capital isn’t spread thinly across all prices.

Instead, the provision to stack liquidity in a specific price range — where trading is likely to occur in the immediate to medium term — drastically magnifies the liquidity provider’s efficiency. In turn, this allows them to earn more rewards from the same capital while concurrently eliminating the risk of impermanent loss.

In Genius DEX, there will be three liquidity position states — open, filled, and closed — , representing different stages required to meet the demand side of the exchange from a fragmented pool state that’s also divided into two dimensions — price ticks, that is, the minimum price movement of a trading instrument — and liquidity providers. The transition of liquidity position from one state to another, say from open to filled, is within a high throughput environment in Cardano enabled by its UTxO architecture. Genius DEX can process more transactions every second because it takes advantage of Cardano’s inherent parallelism, allowing concurrent, parallel transaction processing within the same block.

Besides, Genius DEX uses fragmented pools that drastically lower memory requirements. Fragmented pools also give more latitude for the development of arbitrary liquidity curves that can adapt to changing market conditions leading to efficient asset allocation, regardless of shifting trader sentiment in the market.

 

Incentivizing Liquidity Provision

Genius DEX’s liquidity providers will receive a portion of the execution fee paid by the trader. The execution fee is paid when the SOR executes the order. At the same time, the exchange will incentivize liquidity provision to specific pools by distributing GENS rewards.

Genius DEX doesn’t charge a fee for placing an order except for the standard Cardano on-chain fee. 20 percent of fees earned by the DEX from the Execution fee will be returned to GENS holders via the GENS Staking program.

 

Discover our Youtube Video on Concentrated Liquidity Provider : https://youtu.be/TO2DWLUQHMY