**Concentrated Liquidity Is Coming Over To Fantom & SpiritSwap — What Does It Mean?**

Greetings, dear Spiritors! We hope you are doing fantastic. Another week has arrived, and with it, a significant DAO proposal has been approved, leading SpiritSwap to further decentralization and offering more features to the DAO’s users. This time, in collaboration with the Algebra team, SpiritSwap will introduce concentrated liquidity to users! These concentrated liquidity pairs will aim to generate higher swap fees, therefore attracting more liquidity to the platform and the Fantom chain. But how will it work? Let us guide you through an informative explanation of how Algebra has implemented concentrated liquidity and how SpiritSwap and Fantom will benefit from it!

**The Proposal By The Algebra Team**

As previously mentioned, the Algebra team submitted the proposal for the community to vote as of February 9th, 2023, which passed with 100% of the votes meeting the quorum, with 144M inSPIRIT in favour of it. To learn more about the Algebra team and the proposal, you can follow the Snapshot link or read our Medium article about the proposal. As stated in the introduction, the proposal involves bringing concentrated liquidity to SpiritSwap, and it is considered one of the biggest decisions ever voted for by the DAO. Now let’s explain how it’ll all work out.

**Concentrated Liquidity Explained**

Concentrated liquidity refers to a new approach to how liquidity bands are set within an AMM’s liquidity pools. This approach allows liquidity providers to allocate their funds to a specific price range rather than maintaining a constant product of the two token balances in the LP, as per the X*Y=K model. This enables LPs to create personalized price curves to their liking, maximizing their capital efficiency, and earn more trading fees while providing deeper liquidity for traders.

The traditional AMM approach, called the “x*y = k model”, uses a constant balance between tokens in the pool, resulting in smaller trading fee bonuses for LPs and higher slippage. In contrast, concentrated liquidity allows LPs to open as many positions as they want in a pool, and earn fees when the price enters a specific range. This approach results in LPs earning more fees with less capital and traders benefiting from reduced slippage and deeper liquidity when and where it’s needed most.

Additionally, LPs can choose to take on more risk by investing in a smaller price range, which is remunerated fairly by increasing their LP effectiveness. This approach is more capital-efficient and can provide greater returns to LPs, especially compared to the traditional “x * y = k” model. By using the liquidity more efficiently, LPs of the V3 models (with concentrated liquidity) can earn 5 times more from the same liquidity they have provided compared to the LPs of the x * y = k model. In fact, our friends over at Algebra Finance have studied a potential scenario in their fantastically written Help Center article. In our very similar scenario, we will use the FTM/USDC pair and try to highlight how we can help FTM-USDC liquidity providers on Fantom to multiply their returns!

**Concentrated Liquidity With A Mathematical Example**

In summary, it’s assumed that Person V2 and Person V3 are providing liquidity to the FTM/USDC pool. They both have $500K in $FTM and $500K in $USDC, which is $1M for each person. Person V2 is not using concentrated liquidity and is using an AMM with the x * y = k model, investing all of her tokens across the entire price range. At the time of the article, $FTM was trading around $0.5, so Person V2 deposited 500,000 USDC and 1,000,000 $FTM tokens into the pool.

On the other hand, Person V3 is using an AMM with a V3 model that allows for concentrated positions. He only invests 91,751 $USDC and 183,502 $FTM within the price range of $0.33–0.83.

Even though Person V2 deposited 5.44 times as much capital as Person V3, if the FTM/USDC price stays within the range that Person V3 concentrated his liquidity in, they will earn the same amount of fee rewards. This is an excellent example that illustrates the mathematical advantage of being a liquidity provider on a V3 AMM.

Continuing with the same example, it’s important to discuss the potential additional scenarios that might happen after providing that liquidity. If the FTM/USDC price breaks out of the price range, Person V3 will no longer earn fees, and his funds will be converted to the less valuable token. Meanwhile, Person V2’s liquidity on V2 DEXs will be exposed to impermanent loss to a lesser degree. We can think of a full-range position on a V3 DEX with concentrated liquidity equivalent to the usual position on a V2 DEX. The smaller the range, the faster liquidity is converted as the price moves. Choosing a concentrated position and taking on more impermanent loss risk is compensated by increasing LP effectiveness.

In the worst-case scenario where one token loses all its value and its price falls to 0, both Person V2 and Person V3 will end up with the asset worth nothing. However, Person V3 will only lose about $183,500 (16% of his capital), with Person V2 losing all of its capital, as she had to deploy all of that liquidity to get the same amount of reward as what Person V2 made with 16% of his capital.

This same situation also applies to traders! If you are trading FTM-USDC on a V2 DEX, you will not have the benefits available on a V3 AMM. On a V3 AMM, liquidity is distributed to where it is needed most, resulting in less and less slippage for traders.

**Conclusion**

If you enjoy using SpiritSwap, you can participate in our growing DAO by locking your $SPIRIT into $inSPIRIT, which allows you to have a say in all governance proposals, including creating proposals that you believe will improve the DAO. By becoming an inSPIRIT holder, you can join and shape up our ecosystem in which you’ll be able to use concentrated liquidity, make TWAP orders, become a candidate for monthly SoM giveaways, and many more exciting things!

It’s important to emphasize once again that the implementation of concentrated liquidity into SpiritSwap was a decentralized process, with inSPIRIT voters approving the proposal. Thanks to them and the Algebra team, SpiritSwap will become even more decentralized and can provide even better products to our users and the Fantom chain.

The future is a bright one, so let’s be a part of it together!

*SpiritDAO*