Trader Joe V2 improves upon the original automated market maker (AMM) with Liquidity Book, a novel concentrated liquidity design.
Trader Joe V1 was an AMM built on the Uniswap V2 model. Joe V1 utilized the constant product formula (xy=k) to price assets in its liquidity pools. Under this AMM design, users provide liquidity for any price of the token, meaning the liquidity is distributed uniformly between 0 and infinity on the price curve. The latest iteration of Trader Joe V2 follows behind the footsteps of Uniswap V3 with the introduction of its own concentrated liquidity design. Under concentrated liquidity AMMs, users provide liquidity into smaller, custom price ranges. This enables greater fee generation with far less capital but has the added risk of greater impermanent loss. In Joe V2, the Liquidity Book (LB) introduces new features including Liquidity Bins, a new token standard, and variable swap fees that adjust based on the underlying asset volatility. With liquidity bins, liquidity is divided into individual price bins and uses the constant sum model (x+y=k). Bins with only y tokens are priced below the current market price while bins with only x tokens are priced above the current market price. As such, the current market price of the asset always corresponds to the lowest bin with both x and y tokens provided. Price impact only occurs if the price moves from on bin to another during a trade. For example, the token price would update if the swap is large enough to completely deplete the liquidity from one bin. Liquidity providers (LPs) can deposit any amount of funds into any amount of bins. In return, LPs receive LB tokens which represent their LB positions and are fungible tokens that can be deployed across third-party DeFi protocols.
Joe V2 charges variable swap fees that are split between base and variable fees. The base fee is specific to each pool. Variable fees are theoretically capped at a max of 10%. This dynamic fee is intended to mitigate the risk of impermanent loss during periods of significant price volatility. A share of all the fees is collected by the protocol and distributed to JOE holders and is expressed as a variable percentage of the total swap fee (max capped at 25%).
As a liquidity provider (LP) on TraderJoe V2, you earn fees on every trade within a pool; this fee adjust dynamically based on current market volatility and the frequency of swaps. JOE holders can also earn a portion of protocol fees by staking on the platform in exchange for sJOE.*