import SVG from "react-inlinesvg";

# Liquidity Pools

The core functionality of Aerodrome Finance is to allow users to exchange
tokens in a secure way, with low fees and low slippage.

Slippage is the difference between the current market price of a token and the
price at which the actual exchange/swap is executed. This difference could
result in a smaller amount (higher price paid) or a higher amount (smaller
price paid) of desired tokens returned from a swap.

To provide access to the best rates on the market, we identified two types of
tokens:

- correlated - for example _stable coins_ (`$USDC`, `$DAI`, etc.)
- uncorrelated - for example `$AERO` and `$BTC`

Aerodrome Finance offers two different liquidity pool types based on token pair needs, _Stable
Pools_ and _Volatile Pools_. Aerodrome supports custom factories, so that new pool types can always be integrated.

The protocol router evaluates both pool types to determine the most efficient price quotation
and trade execution route available. To protect against flashloan attacks, the router will use
30-minute TWAPs (time-weighted average prices). The router doesn't require _upkeep_ (external maintenance).

The _deeper_ the liquidity of a given pool (higher value locked), the smaller the slippage it will offer.

## Stable Pools

Stable pools are designed for tokens which have little to no
volatility. This means that the formula used for pricing the tokens allows for
low slippage even on large traded volumes.

> x³y + y³x ≥ k

## Volatile Pools

Volatile pools are designed for tokens with high price volatility.
These pools use a generic AMM formula.

> x × y ≥ k

## A visual representation of the formulas

The mathematical formulas are used to keep the total pool liquidity the same at all times.

Below, you can find a visual comparison between the stable (red) and volatile (blue)
AMM pricing equations, where:

- `x` is the amount of first token in the pool
- `y` is the amount of second token in the same pool
- `k` is a fixed constant

<SVG
  src="/svg/docs/graph-liquidity.svg"
  className="w-full max-w-full h-auto mt-4"
/>

## Concentrated Pools

Concentrated liquidity pools require the liquidity
to be deposited within a specific price range and uses ticks (equally
spaced price points) to define the range boundaries. The identifiers
for these pools reflect their tick space. These pools require
maintenance or automated liquidity management (ALM).

## Concentrated Liquidity Tick Spacing

In Aerodrome's concentrated liquidity pools, the concept of **tick spacing** is used.
This refers to the minimum price movement between liquidity ranges.

Stable token pools use a price range boundary of 0.5% (tick space 50) for tokens like USDC, DAI, LUSD.

Volatile token pools use a price range boundary of 2% (tick space 200) for tokens like OP and WETH.

For highly correlated tokens like stable coins and liquid staked tokens,
a price range boundary of 0.01% (tick space 1) is available.

For emerging tokens like AERO and VELO, a price range boundary of 20% (tick space 2000)
is available to reduce liquidity pool re-balance needs.

Concentrated liquidity pools explain what they are in their symbol:

> CL1-wstETH/WETH

CL1 says that this is a concentrated pool with 1 tick spacing,
suggesting the pool token prices are closely correlated.

## Concentrated Liquidity Pool Fees

Pool swap fees are redesigned to be adjusted independently from the pool type.
Fees can now reflect partner protocols needs and can be adjusted based on the market's volatility.
To reduce operational overhead, we are working on a dynamic fee module that will adjust itself on demand.

## Staking APRs

The Annual Percentage Rate (APR) for liquidity pools is calculated
differently for basic and concentrated pools when staking is available.

For basic pools, the APR is calculated using the total staked liquidity.

For concentrated pools, the APR is calculated using the total staked liquidity
within the pool current price range (active tick) and the surrounding (above
and below) price ranges (+/-1 tick from current tick).

## Fee APRs

Fee APRs for pools with staking available are based on the accrued swap fee
amounts for the ongoing epoch (7 days).

For the pools where staking is not available, the APRs are calculated as
averages for the entire pool lifetime and total accrued swap fees in the same
time.