ReCLAMMs: A Passive Approach to Concentrated Liquidity

Hello, everyone. Thanks for having me. Thanks for the introduction. I'm Fabio, data and product at Balancer Labs. And today, I'm going to talk about what we have been building at Balancer V3, specifically Reclam, which is our latest innovation on the AMM space.

Balancer has always been innovating on this space since 2020. So, back in the day, we launched V1 with generalized weighted pools, which is quite interesting because back in the day, we only had 50-50 to tokens that the module popularized by Uniswap V2. But on Balancer V1, you had multiple tokens up to eight, custom fees. Yeah, and that's it. The custom weights allowed us for creating liquidity bootstrapping pools, which are pools that allows you for fundraising.

If you're conducting a token sale, you can change the weights over time, and that allows you to raise funds. And last but not least, one other thing built on V1, which is quite interesting because V1 is five years old, but CalAMM, we launched it last year. So, the technology we built back in the day was quite flexible and allowed us to prototype and create this ng-capturing AMM, which is still alive. We then moved it for Balancer V2 one year later. We introduced the single zone vault, and Balancer was shifting the narrative from being a product to be a platform where people could build new AMMs, new products on top of Balancer instead of going somewhere and starting from scratch.

We introduced it on Balancer V2, the Boosted Pools, which allowed ito assets to be deposited only in the markets and then earn additional yield. We also had many partners building on V2, so we had Jaro, ECLPs, you have Safe Finance building FX pools, and you have Chrome, which built the first implementation of two AMMs on Balancer. And finally, Balancer V3. We switched it to be this platform for programmable liquidity, but we still saw a lot of room for growth. So, on Balancer V3, we focused on improvement of the developer experience.

We doubled down on fungible liquidity because that's our main client or main customer at Balancer, and we focused on yield-bearing liquidity, again, bringing back the Boosted Pools, which I just talked about. Speaking of developer experience, on Balancer V3, you can build custom AMMs with either hooks, so you can add it, an existing pool type, and add pre- or post-interactions before swap, after add liquidity, and stuff like that, but you can also build a custom AMM from scratch, creating another variant. And that's pretty easy, pretty flexible because of the developer experience that we have improved it a lot. Going a bit deeper on the Boosted Pools and how they work, actually on Balancer V3, and different from Balancer V2, we have 100% Boosted Pools. So all the assets, for instance, in a stable pool composed of USDC and USDT, are deposited into a lending protocol.

So we have this symbiotic relationship between the DEXes, which in this case is Balancer, and you have on the other side, the lending protocols, which could be Aave, could be Euler, could be Morpho, or any other like that, which supports the ERC-4166. That's the pattern, that's the standard we build the Boosted Pools on top of. That allows us to provide liquidity providers this additional yield they would not get elsewhere, and that's actually shared across all pool types at Balancer. So actually, a weighted pool, a stable pool, a gyroscope pool, can be a Boosted Pool because its assets can be deposited in a lending protocol, and that's all abstracted away, the complexity is abstracted away by default. Speaking of custom pool types, we launched Balancer V3 last year, December, and since then we had two partners which already launched on Balancer V3.

So we had Gyroscope, which are super liquid pools made specifically for stable coins and yield-bearing assets, as REFs take ETH, and other liquidity-taking of ETH, or any other asset actually, and we have Quantum. Quantum is a quite interesting one, because since the beginning, since Balancer V1, we had this idea of generalized weighted pools and indexed funds being on-chain, and actually Quantum is our more recent attempt to tackle that market. So Quantum, they run Quantum strategies behind the door, they train models and stuff like that, and they create ultra-balancing pools which are designed to capture token appreciation, because if one of your assets is appreciating in value, you don't want to implement laws, you actually want to capture that value, that asset that's growing in value. And one latest one, a pretty interesting innovation by Balancer, is the StableSearch hook. I would claim this is the hook with the most liquidity on-chain, and probably the one that has facilitated most of the volume, if you compare existing hooks across DeFi.

This one is built on top of StableSort, so the math built by Curve, but in this case we have a dynamic fee, so it's designed to protect assets from debugging and charging a fee on the traders that are trying to dump their tokens into the StableSort pool. Pretty interesting for stablecoin issuers and other projects like that. That's what we have been building so far, we have innovated a lot, but there are still some challenges that we couldn't tackle yet, and I would say one of the remaining ones is just increasing the capital efficiency for weighted pools. So we generalize it, the XY equals K, the NFT2 formula, to any tokens, to any ways, but in reality, that's a basic AMM, you provide liquidity across all the prices, so if you're familiar with AMMs, you know that, you provide liquidity from zero to infinity, that's not actually efficient. So we know certain tokens will not cost, or should not cost, you're not willing to provide liquidity on a certain range of prices.

So someone, people from Uniswap in Robinson came up with Concentrated Liquidity, they launched it, which is pretty cool, and introduced some effects, some benefits, for both the liquidity providers and the traders. So for the traders, because you now have liquidity concentrated, you have less slippage, you have a better execution price, and for the liquidity providers, you now can earn more fees per the dollar you invested, because you're only, you're concentrating your position within a price range. That's some of the benefits, but of course, there's some drawbacks on it. So now, if you provide liquidity in a certain price range, and the price of the asset, say, ETH, goes out of range, then you have to reposition, you have to actively manage that position. That means at the end of the day, if the price goes out of range, you'll be only holding one of the tokens, you have to sell half, and then get back into the pool, so that's a bit cumbersome.

You, as a liquidity provider, might be exposed to just-in-time liquidity attacks, because on Concentrated Liquidity AMMs, the swap fees are distributed across the liquidity providers, also according to the concentration they're providing liquidity. And there's this kind of attack, where if there's a big trade, which is moving the price, there will be a bot, which will add liquidity in a super tight range, in order to get all of the fees of that transaction, and the liquidity providers, who have been providing liquidity for a long time, might not get those fees, so that's another drawback. You have the lack of fees compounding, so all the fees, the swap fees accumulated, are consolidated somewhere else, and you have to claim and redeposit again. And last but not least, you have non-transferable positions, so it's hard to incentivize, it's hard to compose, to have composability, and stuff like that. Some solutions have been around to try to tackle those problems, I guess you might have heard of automated liquidity managers, ALMs.

I would say they're still not there, some of them behave as black boxes, and you don't really know what they do under the hood, what their strategy is. You might have additional costs, like the management fees, performance fees, the rebalance is a pretty interesting point, because some of them do all-at-once rebalance, so they might buy the top and sell the bottoms, because of that behavior, and you have other risks, of course, some of these contracts are upgradeable, not immutable, you don't know about the audits, or stuff like that. What I think, or we at Balancer think, that liquidity providers really want, is of course having the capital efficiency, so having concentrated liquidity, but being passive, so no need for active management, no need for rebalancing and shifting the ranges, and finally, also fungible positions, so they can compose, they can deposit in other protocols, and they can incentivize easily, because if everyone shares the same position, it's just a matter of distributing incentives proportionally to the amount of tokens they have. That's what we think that the liquidity providers want, and in order to achieve that, I'm pretty excited about introducing Reclam, that's readjusting concentrated liquidity AMM, we have been working at this for the past, since the beginning of this year, January, and we want with Reclam, first of all, have automatic adjustment of the ranges, so the liquidity providers can set and forget their positions, they don't have to care more about it, the AMM does the job, because it's automated, and you have, as we think the liquidity providers want, you have liquidity fungible positions. There are a few params you can configure in order to create such an AMM, the first one is just the target price, that's the market price at the deployment time, and then you have two params which are actually mutable, so they can be transparently managed by a pool owner slash pool manager, which can change those params, they being first the price range, so that's the mean, and the max price you're providing liquidity within, you have the margin, that's the threshold that creates range adjustments, and last, but very important, you have the price shift, so that's how fast the range moves when you're adjusting.

That's very important, as you might notice, we don't do all add-ons rebalances, so it rebalances over time in order to avoid those permanent losses that you might have on other solutions like other automated liquidity managers. How it works, just three images to keep it simple, so in the first one, you have a pool in range, as you see, you have all the curves, so the math behind it, it's still XY equals K, the same Univ2 formula, but you have a concentration, so you have the red points there, which is the price range, right now, on the first image, the pool is in range and within the margins, on the second image, the pool is out of range, in between the margin and the max or the mean price range, depends on the reference, and then once that happens, the pools start shifting what we call virtual balances in order to adjust its price or the price it's willing of buying or selling assets, and then the market will do the work, because there'll be an arbitrage opportunity for the MEG bots or for the arbitrageurs generally to bring the pool back to the market price, and that's what is happening on the latest image, so the pool is under adjustment, this can happen over and over again, and hopefully over the long run, if the pool is well-designed, if the pool is well-simulated, then you have good parents, and the pool will stay most of the time within the margins, because that's where you have the most capital efficiency, if you are within the margin and the price ranges, then you don't have that much of capital efficiency, you're actually trying to figure what the price of the market is. Overview of the solutions out there, so you have concentrated liquidity, AMM, which this token is an NFT, so it's non-fungible, on Reclaim, that's on year C20, as all LP tokens, the BPTs, as we know on Balancer, the efficiency for both outclaims is high, again, the math is still the same, and the management in one side, you have active, in the other side, you have passive. That does not mean concentrated liquidity is not good, we are building concentrated liquidity, I guess those are different solutions for different users, and Reclaim serves best the passive liquidity providers. The future, hopefully, what we are looking for at Balancer is having DAOs adoption of this module, if you are a DAO or a treasury manager of a DAO, for sure, the Reclaim can be a good option for you, if you want to dip liquidity of your own governance token, you can provide it via Reclaim.

DeFi innovations should be super simple, because again, it's on year C20, it's fungible, you can send, transfer, you can stake, hopefully, you can provide this to other protocols, to your farming, and create composability on top of it. Finally, that's just a simplified UX, you don't have to manage ranges, you don't have to worry about it at all, you just, as I said before, you just set and forget. And what Balancer provides as a platform is, we provide a pool simulator, so params are quite important on this case, and you have to be very sure about what params to choose for different markets, for different pairs, so we are building internally this pool simulator, hoping to release it and make it open source alongside DOCKS, probably by the next week. We are talking to aggregators, because one of the most important thing in order for this solution to also be profitable for the liquidity providers, is to have organic flow, so you don't rely all the time on the arbitrators, which are just seeking profit, so we are talking to aggregators, and actually, we have already got two call solvers integrated with it. And last, you also have the pool creator UI, which hopefully, when the simulator and the creator are funded across people, then people can use it.

Right now, I think those will be more gatekept, because it's still a nascent technology, we don't want to make mistakes, but it will all be open source and out there for anyone to try. Last but not least, Balancer cares a lot about security, so Balancer v3 and reclaims have been audited by the best streams out there, so we have Spurbit, TradeoffBits, and Surtora. Surtora audits like all the hooks and all the custom pools we create, so shout out to them. And we also have this Blackmount program with up to a million dollars in Unify. That's it.

Thanks for having me. Thanks for listening. If you want to reach out to me, if you're a DAO, if you're a liquidity provider, if you're a treasurer manager and want to talk to us, we'll be here. We'll be on ECC as well. We're happy to talk to you guys.

Thank you.