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Ariah Klages-Mundt
@aklamun
A few thoughts we have when we calibrate liquidity pools for LSTs/LRTs. Relevant with the (not unexpected) ezETH depeg. There is a trade-off between LP efficiency and having deep liquidity at depeg prices. There's also a misconception that you need liquidity everywhere. 🧵👇
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Ariah Klages-Mundt
@aklamun
When launching a pool, it's worth differentiating two cases: 1) If this pool will be the main source of liquidity for an asset 2) If it's not the main source of liquidity and it's ok for the price to go out of range
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Ariah Klages-Mundt
@aklamun
When the pool is the main source of liquidity for an asset, you should consider systemic risk in the liquidity design and ensure coverage at depegged prices. This helps to reduce risk for collateral integrations of this asset, risks which can spread throughout DeFi.
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Ariah Klages-Mundt
@aklamun
StableSwap pools with moderate amplification tend to effectively fill this role today.
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Ariah Klages-Mundt
@aklamun
StableSwap provides liquidity at all prices, but it isn't all needed. LSTs/LRTs tend to have high frictions to redeem but not mint. While you may want wide downside liquidity, you can still improve efficiency a lot by removing the part above peg. https://twitter.com/aklamun/status/1776947144991072719
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Ariah Klages-Mundt
@aklamun
If your pool is case 1), often it may need to rely on incentives to keep the pool profitable for LPs as the capital won't be able to be used at peak efficiency at most times. In case 2), you can focus your pool design to be most profitable for LPs and accept that the pool may move out of range.
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Ariah Klages-Mundt
@aklamun
Most @gyroscope pools have fit into case 2) so far, but they can also be calibrated as more efficient case 1) pools.
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