TraderJoe has recently attracted market attention with its Liquidity Book centralized liquidity model. The project's JOE token price has also seen impressive growth since the beginning of the year. What are the benefits of Liquidity Book? Can this model enable TraderJoe to compete with Uniswap v3?

Liquidity Book (LB) - Another approach to centralized liquidity

TraderJoe’s Liquidity Book offers the same benefit as Uniswap V3, where liquidity providers (LPs) can choose a price range to provide liquidity, rather than the default 0 to infinity like the traditional x*y=k model.

This results in a waste of liquidity, because in practice, the prices of many tokens cannot fluctuate within this range (e.g. stablecoin pairs like DAI/USDT). Therefore, liquidity sources in different price ranges will be used unevenly.

Liquidity will then be concentrated in one or more specific price ranges. Capital will then be used more efficiently (the same price slippage will require less TVL).

However, for Liquidity Book, TraderJoe divides token prices into several continuous ranges called liquidity bins.

When users provide liquidity within a certain price range, they are essentially placing their tokens into these liquidity bins.

In each liquidity box (corresponding to a Pi level), TraderJoe will use the formula Pix + y = k, instead of xy = k used on Uniswap (where Pi corresponds to the price in each liquidity box).

For detailed information on liquidity box specifications (such as divisions, how to calculate the number of liquidity boxes, etc.), you can view TraderJoe’s documentation here.

By applying the design of the above calculation formula, if transactions (exchanges) do not cause the price to slip in 1 liquidity storage box, their slippage level will be zero (this detail will be analyzed in more detail later in this article).

Overall, TraderJoe’s Liquidity Book model will provide traders with better slippage benefits while having the same amount of TVL, compared to Uniswap. However, LPs will suffer higher temporary losses.

TraderJoe uses a dynamic fee model to correct this loss for LPs.

Generally speaking, trading fees on TraderJoe consist of two components, a base fee and a variable fee.

Among them, the fixed fee is set by TraderJoe (the protocol owner) for each different trading pair.

The variable fee will depend on market volatility and will increase when a swap order uses more liquidity from the liquidity bin. Therefore, trades that cause large market moves will incur higher fees.

The purpose of this design is to compensate LP for unstable losses.

Comparing TraderJoe and Uniswap’s centralized liquidity models

Volatility Losses and Slippage

As analyzed above, the formula Pi x + y = k will provide better liquidity performance during exchange than the traditional x y = k formula.

For example, an LP provides 50 USDT (x) and 50 DAI (y) of liquidity in price range 1 (assuming there is only one such liquidity storage box in the USD/DAI trading pair). Similarly, another LP provides 50 USDT and 50 DAI to the liquidity pool on Uniswap v3.

Then, the liquidity of the two corresponding pools on TraderJoe and Uniswap are represented by the following two functions respectively:

  • x + y = 100

  • x * y = 2500

The function is illustrated below:

For example, a trader exchanges 5 USDT for DAI on two DEXs. Without transaction fees, the amount of DAI he gets in each case is as follows:

  • On Uniswap: Withdraw 4.(54) DAI (because at this time x*y = 2500 but the x here is the USDT in the pool has increased to 55, so the amount of DAI received is 50 - 2500/55 = 4.(54) DAI).

  • On TraderJoe: Withdraw 5 DAI. Because he put 5 USDT into the pool and got DAI. Then the amount of x in the pool will be 55, and in order to keep k = 100, the new y will be 45. This is equivalent to him getting 5 DAI.

Therefore, this trader will gain more in terms of slippage when trading on TraderJoe.

But for LP:

  • On Uniswap v3, their remaining LP tokens are 55 USDT and 45.(45) DAI.

  • On TraderJoe LP, their remaining tokens are 55 USDT and 45 DAI.

Therefore, LPs on Uniswap v3 will face less impermanent loss than TraderJoe due to owning more tokens (assuming DAI and USDT remain pegged to $1).

Token Standards and Bar Allocation

Despite having the same centralized liquidity model, TraderJoe’s liquidity arrangements and token standards differ from Uniswap v3.

In Uniswap v3, LP will receive NFT after providing liquidity. This makes it less flexible to change the position of LP.

Shared, NFTs representing different LPs will be arranged horizontally on Uniswap v3. In contrast, the liquidity of each LP on TraderJoe is arranged vertically along the liquidity bin.

In addition, the LP tokens on TraderJoe are designed by the project according to the ERC-1155 standard. Therefore, it will be more flexible and less costly to adjust liquidity for different purposes on TraderJoe (for removing gas for adding liquidity, ...).

Some statistics about TraderJoe’s liquidity ledger

There are many assumptions in the community, one of which is the expectation that TraderJoe, through its liquidity ledger model, will be able to compete with and become a better version of Uniswap (on the Arbitrum ecosystem).

Since launching v2 (a centralized liquidity model with a liquidity ledger), TraderJoe has collected over $30M in TVL on the Arbitrum ecosystem.

In particular, JOE’s TVL on Arbitrum has skyrocketed since March 23, 2023 (the date ARB officially went public).

The project’s JOE token has naturally also seen a ~300% profit since the beginning of 2023.

Specifically, the JOE token price increased from $0.13 at the beginning of the year to $0.53 on March 29, 2023.

Currently TraderJoe is still far behind Uniswap v3 (on Arbitrum) in terms of TVL.

Specifically, TVL on Uniswap is close to $300 million, nearly 10x higher than TraderJoe’s $32 million (on Arbitrum).

Therefore, in order to be able to compete with Uniswap v3 in the DEX array, TraderJoe needs to have higher capital efficiency in TVL and lower transaction fees than Uniswap.

Data shows that TraderJoe (Arbitrum) tends to have a higher TVL ratio than Uniswap v3. Therefore, capital is now more efficiently used on TraderJoe v2 (Joe's average volume/TVL ratio is about 1.5x that of Uniswap).

Due to the dynamic fee mechanism described above, the average transaction fee rate on TVL for TraderJoe v2 is about 3.13 times higher than Uniswap v3 on Arbitrum. Comparing the above volume/TVL ratios, we can see that TraderJoe v2 brings higher efficiency in terms of fees and volume.

Regarding valuation based on P/F (fully diluted) (F here is the transaction fees collected, including a portion of LPs). TraderJoe is currently valued lower than Uniswap.

Uniswap has a P/F ratio of 6.91, which is 14% higher than TraderJoe. However, Uniswap is much larger than TraderJoe (based on the TVL of the Arbitrum ecosystem alone, Uniswap v3 is 10x larger than TraderJoe).

Therefore, TraderJoe v2 has a more optimized centralized liquidity model than Uniswap v3 in terms of user experience and benefits. However, there are still many questions to be answered, especially how to make TraderJoe on par with Uniswap when the JOE token is used for liquidity mining.

Additionally, right now TraderJoe’s P/F ratio is close to Uniswap, so when comparing market share, TraderJoe’s current valuation is quite reasonable compared to Uniswap (assuming the stock price doesn’t fluctuate wildly).

Therefore, in many ways, the current data of TraderJoe v2 shows that it is more efficient than Uniswap v3.

However, in the near future, when the license of Uniswap v3 expires, there may be a wave of centralized liquidity adoption on DEX, which will directly affect TraderJoe’s future market share.

Therefore, although TraderJoe has taken a different approach to demonstrate its optimization, the project team still needs to gain more market share from Uniswap v3 and potential competitors in the future.

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