Concentrated Liquidity with Leverage

TL;DR

This paper formalizes the principles of leveraged concentrated liquidity provisioning in DeFi, modeling margin, assets, and debt to demonstrate the safety properties of leveraged liquidity provider positions.

Contribution

It introduces a formal model for leveraged CL positions, analyzing their properties and demonstrating their safety in DeFi protocols.

Findings

Leveraged CL positions have inherent safety properties.

Formal model of margin, assets, and debt in leveraged CL.

Provides theoretical foundation for safer leveraged liquidity provision.

Abstract

Concentrated liquidity (CL) provisioning is a way how to improve the capital efficiency of Automated Market Makers (AMM). Allowing liquidity providers to use leverage is a step towards even higher capital efficiency. A number of Decentralized Finance (DeFi) protocols implement this technique in conjunction with overcollateralized lending. However, the properties of leveraged CL positions have not been formalized and are poorly understood in practice. This article describes the principles of a leveraged CL provisioning protocol, formally models the notions of margin level, assets, and debt, and proves that within this model, leveraged LP positions possess several properties that make them safe to use.