Liquidity
Liquidity Fundamentals in Argon Protocol
The Argon Protocol is designed around a unique approach where liquidity providers (LPs) extend loans to traders, enabling them to engage in asset-to-stablecoin swaps (for short positions) or stablecoin-to-asset swaps (for long positions) within pre-established Uniswap v3 pools. Argon Protocol utilizes two main types of liquidity:
Argon Protocol’s Intrinsic Liquidity: This is the focus of this section.
Liquidity from Uniswap v3: Detailed information about Uniswap's liquidity provision is widely available and not the subject here.
Leveraged Liquidity in Argon Protocol
Argon Protocol requires its own liquidity, but the amount needed is significantly less compared to other exchanges, thanks to its ability to leverage this liquidity. For instance, the Uniswap v3 ETH/USDC (0.05% fee) pool has $110 million in concentrated liquidity. Argon Protocol can integrate with such pools, instantly accessing a market depth of $110 million for traders. Even with just $1 million of its own liquidity, Argon Protocol can support trading in a liquidity pool of $110 million, achieving a capital efficiency of up to 110 times.
Deposit Token Composition in Liquidity Pools
Liquidity pools in Argon Protocol comprise a blend of two tokens, based on what the exchange is trading. For an ETH/USDC exchange, liquidity providers are required to deposit equal value amounts of both ETH and USDC.
Withdrawal Token Composition and Balancing
Price fluctuations of the underlying assets can lead to imbalances within the internal liquidity pool. For example, a 50% increase in the value of ETH would result in a higher ETH value compared to USDC in the Argon Protocol pool. New LPs depositing post-appreciation would contribute equal value amounts at the current market rate, thereby obtaining a share corresponding to the pool's existing ratio, not the ratio of their deposit. This mechanism serves to rebalance the liquidity pool in Argon Protocol.
Illustrative Example
Initial Scenario: With ETH at $1000, the liquidity pool contains 10 ETH and 10,000 USDC, equaling $10,000 in value for each.
Post-Appreciation: If ETH’s price rises to $2000, the pool would have $20,000 in ETH and $10,000 in USDC.
New LP Deposit: A new LP contributing at the $2000 ETH price would deposit equal value amounts in ETH and USDC. Their deposit rebalances the pool, and they end up owning a greater proportion of ETH than USDC.
Withdrawal Scenario: Upon withdrawal, they would receive $22,856 in ETH and $17,144 in USDC. The total value equals their initial $40,000 deposit (minus rounding errors), but with a greater proportion in ETH due to their contribution to rebalancing the pool.
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