Liquidity Pools & Fee Structure
Liquidity Pools on Solar DEX
Solar DEX offers two types of liquidity pools—v2 Standard Pools and v3 Concentrated Pools—each with unique mechanisms and advantages tailored to different types of liquidity providers (LPs) and trading preferences.
v2 Standard Pools
In v2 Standard Pools, liquidity providers deposit two assets in equal value, such as ETH/USDC, into a shared liquidity pool. This setup creates a broad-range liquidity model where LPs provide liquidity across the entire price range for the trading pair. Using the constant product formula (x * y = k), these pools adjust prices based on the relative supply and demand for each asset within the pool.
Benefits for LPs: This model allows LPs to earn a proportional share of fees from all trades in the pool, regardless of price. It’s ideal for LPs who prefer a passive role, as they do not need to actively manage their positions or adjust price ranges.
Advantages for Traders: v2 pools offer consistent liquidity across a wide range of prices, making it suitable for trades on assets with volatile or unpredictable price movements. Traders experience minimal slippage, especially on high-liquidity pairs.
v3 Concentrated Pools
In contrast, v3 Concentrated Pools allow LPs to focus their liquidity on specific price ranges, maximizing capital efficiency. Instead of spreading liquidity across all possible prices, LPs select a custom price range within which they believe trading will occur. This model is particularly effective for stablecoin pairs and highly liquid assets, where price fluctuations tend to stay within predictable ranges.
Benefits for LPs: Concentrating liquidity in targeted ranges allows LPs to earn higher fees with a smaller capital commitment. When trading activity aligns with their chosen range, LPs can capture fees more effectively than in v2 pools, achieving greater returns on their capital.
Advantages for Traders: With liquidity concentrated around active price points, traders benefit from reduced slippage and deeper liquidity within these ranges. This is particularly valuable for high-frequency or large-volume trades, as it minimizes the impact on prices.
Fee Structure on Solar DEX
The fee structure in Solar DEX varies depending on the pool type, with a design aimed at rewarding liquidity providers proportionally to the risks and capital commitment involved.
v2 Standard Pool Fees
In v2 pools, fees are typically a fixed percentage of each trade. This rate is divided among LPs based on the proportion of the pool they contribute. A standardized fee structure, such as 0.3% per transaction, is common, although some pools may adjust based on demand and trading volume.
Fee Allocation: The collected fees are distributed to LPs in proportion to their contribution to the pool. For example, if an LP provides 20% of the pool’s liquidity, they receive 20% of the total fees generated.
Reinvestment: Fees can be compounded directly back into the pool, allowing LPs to grow their stake and earn compounding returns without manually reinvesting.
v3 Concentrated Pool Fees
Fees in v3 pools are dynamic, often customized per pool or range based on liquidity concentration. This flexible structure lets LPs set different fee tiers (e.g., 0.05%, 0.3%, or 1%) depending on the asset pair's volatility and the depth of liquidity at specific price ranges.
Fee Tier Selection: LPs can choose different fee tiers when providing liquidity, aligning their exposure with market activity and earning potential. Higher fees generally apply to more volatile or less liquid pairs, while stable pairs often have lower fees due to their predictable price ranges.
Incentive for Active Management: Since LPs in v3 pools actively manage their liquidity within specific ranges, they earn a higher proportion of fees when trading activity stays within their selected range. This rewards LPs who strategically align their positions with market trends.
Why This Structure Benefits Investors and Users
The dual-pool system on Solar DEX provides a comprehensive and flexible liquidity environment that appeals to a range of users, from passive LPs to active traders. The Eclipse Network's low transaction costs and high throughput enhance these benefits by minimizing trading fees and slippage, encouraging both trading volume and liquidity provision. For investors, this model positions Solar DEX to capture significant market share by catering to varied liquidity needs, increasing both user acquisition and retention in a scalable, growth-ready ecosystem.
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