Deposit Liquidity
Deposit Liquidity and CLB Tokens
Using Chromatic Protocol's user interface, makers can decide which of the liquidity bins to provide liquidity to and deposit the amount of liquidity they want to provide. Each liquidity bin becomes a meeting point for the investment strategies of both takers and makers.
When makers provide liquidity to a market in the Chromatic Protocol, they receive CLB Tokens(Chromatic Liquidity Bin Token, ERC-1155) corresponding to the value of liquidity they provided. The CLB token is issued as a medium to reflect the value of the current liquidity provided in each bin, and given to makers who provided liquidity into Chromatic Protocol’s liquidity bins. The CLB tokens represent a makers’ share of the bin and the liquidity can be redeemed by burning CLB tokens, and could be traded via general NFT marketplaces. A token contract is created for each market, and 72 individual token IDs are issued from this contract.
The CLB token value is calculated based on the maker's deposit amount, the maker's PnL (including unrealized), and accumulated trading fees and interest.
Makers can mint (deposit liquidity) or burn (withdraw liquidity) CLB tokens, hold them to generate profits in return for providing liquidity or trade them to pursue trading profit.
Takers pay trading fees, interest, and PnL to the individual liquidity bins and take profits accordingly. The value of each individual liquidity bin is affected by the trading fees, interest, and PnL paid by the taker. Makers have the flexibility to mint or burn CLB tokens to pursue additional profit. They can employ different strategies depending on the status of the bin.
Scenarios of Deposit Liquidity
High-utilization bin (low-fee bin): Makers may choose to deposit liquidity directly into the bin rather than buying CLB tokens. Since the liquidity will be utilized immediately, there is a high demand for depositing funds directly into the bin.
50% utilization bin (market-balanced fee bin): Makers may choose to buy CLB tokens already minted as it is more advantageous, rather than depositing funds directly. This allows for securing a larger share. There is a higher demand to buy CLB tokens through secondary market trading rather than minting them.
For example, let's consider a bin with an initial total liquidity of 10,000 USDC. Initially, 10,000 CLB tokens were issued, and the current utilization is 50%. Therefore, interest and fees will be generated only on the 5,000 USDC, which will be distributed among the 10,000 CLB token holders.
Alice wants to provide liquidity to this bin with 1,000 USDC. Alice can deposit 1,000 USDC into the liquidity bin and receive 1,000 CLB tokens. In this case, Alice's share will be 1,000/11,000.
Alternatively, Alice can buy 1,000 CLB tokens from the secondary markets. In this case, Alice's share will be 1,000/10,000.
Therefore, buying CLB tokens directly is more advantageous as it increases Alice's share of the entire bin. Hence, the price of 1000 CLB tokens is expected to be traded above 1,000 USDC.
Low utilization bin (high-fee bin): Makers may burn CLB tokens and withdraw liquidity because the profitability of the bin utilization is low.
Scenarios of Withdraw Liquidity
High-utilization bin: This bin will attract more liquidity inflow. Makers can burn CLB tokens and withdraw liquidity after waiting for the inflow of sufficient liquidity. If they choose to trade CLB tokens directly on the secondary market without waiting, they might have to sell CLB tokens at a lower price.
Mid-utilization bin: As liquidity is available, makers can burn CLB tokens and withdraw liquidity. If they trade CLB tokens on the secondary market, they can sell at a higher price.
Low-utilization bin: Makers can burn CLB tokens and withdraw liquidity any time as much as they want.
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