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On this page
  • 1. Introduction to ALP
  • 2. Theoretical Framework
  • 3. Dynamic Swap Fee Mechanism
  • 4. Liquidity Adjustment Algorithm
  • 5. Risk Management
  • 6. ALP Implementation
  • 7. Practical Application of ALP
  1. VersaDex [ 2 0 2 5 ]
  2. For Liquidity Providers

Adaptive Liquidity Provision (ALP)

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Last updated 1 year ago

1. Introduction to ALP

VersaDex’s ALP is an innovative system designed to dynamically adjust liquidity in response to market conditions, aiming for optimal capital efficiency and minimized impermanent loss. This dynamic approach to liquidity management leverages real-time data and complex calculations to maintain a competitive edge for liquidity providers.

2. Theoretical Framework

The ALP operates on the principle that liquidity should be a function of market volatility (σt​σt​σt​) and trading volume (Vt​Vt​Vt​). The underlying hypothesis is that in times of high volatility, the risk of impermanent loss increases, and therefore, the liquidity provided (Lt​Lt​Lt​) should be adjusted to mitigate this risk.

Mathematical Notation:

  • Vt​Vt​Vt​: Trading volume at time ttt.

  • σt​σt​σt​: Volatility of the asset at time ttt.

  • Lt​Lt​Lt​: Liquidity provided at time ttt.

  • f(Vt​,σt​)f(Vt​,σt​)f(Vt​,σt​): Function determining the optimal liquidity based on volume and volatility.

Optimal Liquidity Function:

The optimal liquidity at any given time ttt is determined by the function:

Lt=f(Vt,σt)=k⋅VtσtαL_t = f(V_t, \sigma_t) = k \cdot \frac{V_t}{\sigma_t^\alpha} Lt​=f(Vt​,σt​)=k⋅σtα​Vt​​

Where:

  • kkk: Proportionality constant.

  • ααα: Volatility weighting factor, typically greater than 1.

3. Dynamic Swap Fee Mechanism

The dynamic swap fee is a function of the liquidity and volatility in the market.The fee increases with volatility to compensate liquidity providers for the increased risk.

Swap Fee Function:

Where:

4. Liquidity Adjustment Algorithm

VersaDex employs an algorithm that periodically adjusts the liquidity in response to market conditions.

Algorithm Steps:

5. Risk Management

To quantify the risk and potential impermanent loss, the following formula is used:

Impermanent Loss Function:

6. ALP Implementation

The ALP system is implemented via smart contracts that execute the above algorithms and adjust the liquidity and fees in real-time.

Smart Contract Functions:

  • updateLiquidity(uint256 V_t, uint256 σ_t): Updates the liquidity levels based on the latest volume and volatility data.

  • updateSwapFee(uint256 σ_t): Updates the swap fee schedule based on the current asset volatility.

7. Practical Application of ALP

Market Condition Monitoring:

  • ALP continuously monitors market conditions, including asset volatility, trading volume, and external market factors.

  • Utilizes real-time data feeds and APIs to gather market data from various sources.

  • Employs statistical analysis to measure asset volatility and trading volumes over different time horizons.

Optimal Liquidity Determination:

  • Implements optimization algorithms to solve for the optimal liquidity provision levels.

  • Utilizes machine learning models to predict market conditions and adjust liquidity provision strategies proactively.

Liquidity Adjustment:

  • Increases or decreases liquidity provision based on market conditions to capture trading fees or minimize impermanent loss.

Real-Time Data Utilization:

  • Uses high-frequency data analysis and blockchain oracles to enhance data accuracy for liquidity adjustments.

Risk Mitigation:

  • Employs risk assessment algorithms and provides tools for liquidity providers to set risk preferences.

Performance Monitoring and Analysis:

  • Offers a dashboard for performance monitoring and back-testing environments for strategy evaluation.

The Adaptive Liquidity Provision feature on VersaDex is meticulously engineered to optimize liquidity provision dynamically, providing liquidity providers with a distinct competitive advantage, and ensuring they can adapt swiftly to market conditions.


The higher the volatility (σt​σt​σt​), the more the liquidity provision (Lt​Lt​Lt​) is reduced to protect against impermanent loss.

Let St​St​St​ be the swap fee at time ttt. The dynamic swap fee is given by:

St=g(σt)=β⋅σtγS_t = g(\sigma_t) = \beta \cdot \sigma_t^\gamma St​=g(σt​)=β⋅σtγ​

βββ: Base fee level.

γγγ: Volatility fee multiplier, determining fee sensitivity to changes in volatility.

Data Collection: Obtain Vt​Vt​Vt​ and σt​σt​σt​ from the market.

Liquidity Calculation: Compute Lt​Lt​Lt​ using the optimal liquidity function.

Fee Update: Adjust St​St​St​ based on the current volatility using the swap fee function.

Liquidity Provision Adjustment: Update the liquidity pools with Lt​Lt​Lt​ and the swap fee schedule with St​St​St​.

Given two assets AAA and BBB, with prices pA​pA​pA​ and pB​pB​pB​ respectively, the impermanent loss ILILIL when the price of AAA changes to ′pA′​′pA′​′pA′​ is given by:

IL=2⋅pA′pB′−(pApB+pB′pA′)IL = 2 \cdot \sqrt{\frac{p_A'}{p_B'}} - \left( \frac{p_A}{p_B} + \frac{p_B'}{p_A'} \right) IL=2⋅pB′​pA′​​​−(pB​pA​​+pA′​pB′​​)