Market Modes — All You Need to Know (Part 3)
What is Dynamic Mode?
In the previous articles, we saw that bull and bear modes focus on the price moving in one direction only, either up or down, but dynamic mode can adapt to both upward and downward price movements.
Why would you choose it?
You can choose dynamic mode if you would like the protocol to keep your liquidity moving according to the updated price of a token pair in a bullish and bearish market.
Usually, this mode is best suited for pegged assets like ETH/WBTC or LST assets. But mainly it depends on your risk appetite and strategy narrowness to choose the automation direction.
⚙️Here’s how it works:
If you choose the dynamic mode, you can add liquidity in the current price range or in the adjacent ranges on either side.
Let’s say there’s a pool where you can exchange ABC for XYZ tokens. You deposit all your liquidity in the ticks just left to the current active range, holding entirely ABC tokens.
Now there could be two scenarios:
🔺When the price of XYZ increases:
- Traders start swapping ABC for XYZ.
- All the XYZ tokens in the current range will be traded out and the price will move to the right into the next range which predominantly has XYZ tokens.
- A51 will move your liquidity (primarily ABC tokens) to the ticks on the left of the new active range.
This is like the bull mode where liquidity follows upward price movements.
🔻When the price of XYZ decreases:
- Traders will swap XYZ for ABC.
- It will push the price left on the liquidity graph, out of the current active tick, and into the tick where your liquidity was recently readjusted.
Now your position includes the current active tick. - As XYZ’s value continues to drop, the price moves through the active tick, swapping all ABC for XYZ, and into the ticks on its left.
- Your liquidity is now in the ticks right of the active tick, consisting entirely of XYZ.
- If the price keeps going left, A51 will reposition your XYZ into the tick directly to the right of the new active tick.
💰️How will you earn more?
Dynamic mode maximizes fee collection by keeping your liquidity concentrated close to the changing price. Each time the price intersects with the tick containing your liquidity, you earn fees and maximize your potential income.
⚠️But here is a disclaimer:
Dynamic mode is riskier than other modes because you are exposed to price changes in both directions. There’s also a risk of permanent loss because you may agree to sell tokens that might not perform well at the moment.
So, while it can offer more rewards, users should understand the risks before choosing this mode.
