An Introduction to Liquidity Shapes

Getting started with Liquidity Shapes

Trader Joe avatar
Written by Trader Joe
Updated over a week ago


  • Introduction to Liquidity Shapes

  • What exactly is a Liquidity Shape

  • How to earn fees using a Shape

  • The types of Shapes and Strategies

  • Your Risks

Liquidity Shapes and Strategies

The Liquidity Book AMM, built by Trader Joe, opens up new yield opportunities for your liquidity. The innovative design of the Liquidity Book means that, as a liquidity provider, you can achieve maximum capital efficiency through unparalleled levels of flexibility and customization when deploying your liquidity.

Deploying and managing liquidity using the Liquidity Book offers you endless possibilities. Just take a look at the video below to see some of the options available to you.

What exactly is a Liquidity Shape?

You may be curious about what constitutes a "liquidity shape." Typically, when you deposit your liquidity into a pool, you distribute your tokens across selected price points. However, the Liquidity Book is distinct in that it allows you to construct varying "shapes" by allocating different amounts of tokens at diverse price points that are referred to as 'bins'. Each bin represents a fixed price pool in a Liquidity Pool and when you deploy your Liquidity, you will be defining your range by selecting bins. This concept is known as building a liquidity shape.

Custom liquidity shapes allow liquidity providers to tailor strategies to their risk preferences, market outlook and time horizons. There is no right or wrong liquidity shape – each one will perform the best depending on your own management of your position and also market conditions.

Below is a high level Liquidity Shapes, each specific bar you see in the liquidity shape is one bin and each bin represents a fixed price point. The below image outlines the three core shapes you can deploy, with an overview detailing the key use-case of each shape.

Please note that providing concentrated liquidity can come with large risk of impermanent loss if a position is not monitored closely. No strategy deployed will prevent the possibility of Impermanent Loss. You must monitor your position.

Earning Fees: The Active Bin

The main aim for any Liquidity Provider is to earn fees captured by the trading activity that occurs in a Liquidity Pool. To earn fees using Liquidity Book, your liquidity must be within range. If your liquidity is in range, you will see the 'active bin' which is visualised on the UI as being split by two colours, see the image below for further clarity on how the 'active bin' will appear on the UI.

To enhance your earning potential, you are expected to manage your liquidity, keeping it balanced and within range. Liquidity Shapes and the strategies you deploy and how you go about managing your liquidity, are all key to how you earn fees.

Learn more about the unique shapes and strategies

The guide below is split between Basic and Advanced strategies.

Basic strategies: The most suited for users who are just getting familiar with concentrated liquidity, the Liquidity Book and its bin architecture. They can be deployed in one click using Trader Joe’s interface and don’t require any advanced knowledge.

Advanced strategies: Combine two or more basic shapes to achieve even more granular control over liquidity. They are more difficult to deploy and carry greater risks but can yield better rewards.

Single side strategies: By deploying just one side of the market, you can execute entry/exit to a specific token on the other side of the market. Utilising the different shapes available will further enhance your efficiency of how you enter/exit a token.

Below is an example of the different types of shapes and ranges you can deploy

It is highly recommended that you take time to read the guides linked above to help inform your own understanding of how you can utilise different Liquidity shapes to meet your personal strategy when using the Liquidity Book.

Risks when managing liquidity

Engaging in providing Liquidity using the Liquidity Book protocol involves risks, including but not limited to impermanent loss, smart contract vulnerabilities, systemic failures, liquidity crunches, regulatory changes, market volatility, and operational errors. Your capital is at risk; only invest funds you can afford to lose. No assurance or guarantee is provided, and LPs assume all responsibility for their investments. Seek independent financial advice as needed.

If you have any questions about Liquidity Shapes and how to deploy them please join the Trader Joe Discord for further assistance

Did this answer your question?