💡 A concentrated liquidity exchange arrives on TON: What does it mean?

⚫️ The new decentralized exchange TONCO has launched on TON Blockchain. What sets it apart from other DEXs in the ecosystem, is a concentrated liquidity. As part of our #howtoton educational series, let’s break down the concept in simple terms.

⚫️ Decentralized exchanges rely on «liquidity pools» — reserves of token pairs (e.g., TON/USDt). When a user swaps TON for USDt or vice versa, the exchange takes the token being traded, adds it to the pool, and withdraws the equivalent amount of the other token.

⚫️ The more funds in the pools, the better. Anyone can contribute their assets to these pools and become a «liquidity provider.» In return, the exchange shares with providers a portion of the fees it earns from trades.

⚫️ This feature allows liquidity providers to specify a condition: «My funds can only be used within a certain price range.» For example, they might contribute to the TON/USDt pool with the condition: «Only for trades when the price is between 5 and 6 USDt per TON.» If the price of TON moves outside this range, their funds are excluded from the pool for trading.

⚫️ Why do this? By focusing on the «most active» price range, providers can earn more fees: their funds are concentrated where the most trades occur, rather than being spread across the entire market. This benefits traders as well — with more liquidity in the most popular price ranges, slippage (unexpected price movement during trades) is reduced.

⚫️ Typically, liquidity providers receive an LP token representing their contribution to the pool, which they can later redeem for their share. However, with concentrated liquidity, where each provider may set unique conditions, using standard interchangeable tokens becomes impractical. TONCO addresses this by issuing NFTs to liquidity providers instead of LP tokens.

🖊 The concept was first implemented on Ethereum by Uniswap exchange in 2021, and now it’s making its way into the TON ecosystem. In addition to TONCO, the Bidask project is also working on the technology, and soon, developers will be able to create concentrated liquidity pools on DeDust.io using its extendable protocol, DeDust X.

@thedailyton