Problem: Lazy Liquidity

Although the Constant Product Market Maker (CPMM) is effective for pools containing tokens with highly volatile prices, traders tend to experience slippages and low capital efficiency due to lazy liquidity. Lazy liquidity refers to tokens in a liquidity pool that are excluded from their usual price range, resulting in a lower trading volume and higher slippage.

The price of a pool is determined by the ratio of token reserves in the pool, defined as y/x (the number of quote tokens divided by the number of base tokens). If we define the usual price range of the pool as (Pa, Pb), we can plot a graph that displays the lazy liquidity of a pool as shown below:

For pools containing tokens that are relatively stable in price (e.g., stablecoins pegged to the same asset or a token paired with its liquid staking token), lazy liquidity becomes a severe issue. Assuming a usual price range of (0.99, 1.01), which is a common scenario in the aforementioned pools, 99.5% of total tokens in the pool are wasted as lazy liquidity.

Minimizing lazy liquidity is important for improving the efficiency of liquidity pools and reducing the slippage for traders. This can be solved by managing the price range of a pool and incentivizing liquidity providers to supply tokens that fall within that range, which will increase capital efficiency and provide a better trading experience for all users. There are various techniques and strategies for minimizing lazy liquidity, and Gnoswap is committed to exploring and implementing the most effective approaches for our users.