This section will discuss the concept of liquidity in Caviar's custom pools and its impact on the trading process. Custom pools offer additional control and flexibility for liquidity providers compared to shared pools, enabling them to create pools with advanced parameters tailored to their specific requirements.

Role of Liquidity Providers in Custom Pools

Liquidity providers (LPs) play a crucial role in custom pools by depositing NFTs and their associated reserve assets (e.g., ERC20 tokens or ETH) into the pool. These deposits create a market for users to trade NFTs without the need for a direct buyer or seller. In return for providing liquidity, LPs earn trading fees from swaps that occur in their custom pool.

Adding Liquidity to Custom Pools

To add liquidity to a custom pool, users follow these steps:

  1. Create a custom pool: The liquidity provider sets up a custom pool with their preferred parameters, such as concentrated liquidity, stolen NFT filtering, custom fee rates, flash loan support, and NFT weightings.

  2. Deposit NFTs and reserve assets: Users deposit the NFTs they want to provide liquidity for, along with an equivalent value of the associated reserve asset. The amount of the reserve asset required is determined by the AMM algorithm, based on the pool's current state and custom parameters.

  3. Receive ownership NFT: Upon depositing NFTs and reserve assets, the liquidity provider receives an NFT representing their ownership of the custom pool. This ownership NFT can be used to claim trading fees earned or to withdraw the deposited assets later.

Concentrated Liquidity

Concentrated liquidity is a feature that allows liquidity providers to allocate their assets within specific price ranges, rather than across the entire price spectrum. This way, they can focus their liquidity where it is most likely to be utilized, improving capital efficiency and potentially increasing their returns.

When creating a custom pool, liquidity providers can set a price range for their concentrated liquidity by defining upper and lower price bounds.

Impact of Liquidity on Custom Pools

Liquidity has a direct impact on the trading experience and price discovery in custom pools:

  1. Price stability: Higher liquidity levels in a pool result in greater price stability, as the impact of individual trades on the overall price is minimized.

  2. Slippage: Adequate liquidity helps reduce slippage, which is the difference between the expected price and the executed price of a swap. Higher liquidity levels lead to less slippage, providing a better trading experience for users.

  3. Trading volume: Greater liquidity attracts more traders to the pool, as it allows for larger trades without significantly impacting the price.

  4. Trading fees: A higher trading volume results in more fees earned by liquidity providers, as they receive a percentage of each trade that occurs in their custom pool.

By contributing liquidity to Caviar's custom pools, users can create tailored trading environments and optimize their pool's performance according to specific requirements. Custom parameters offer additional control and flexibility, allowing liquidity providers to shape their pools and attract traders looking for specific trading conditions.

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