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Market Making
KNC market making approach is structured around three distinct liquidity layers:
Upon initiation, KNC allocates its resources into a Raydium-specific concentrated liquidity setup that incorporates three distinct segments: the Base Layer, the Stability Layer, and the Expansion Layer.
The Base Layer operates as the liquidity backbone, residing at the lower end of the price spectrum within the pool. It concentrates funds within a narrow band to provide robust support against price dips, effectively safeguarding the token’s base liquidity value (BLV) during market downturns.
The Stability Layer extends from the token’s BLV up to the prevailing market price, covering a broader span. Its role is to maintain fluid trading conditions by accommodating the token’s normal trading activity, thus ensuring market stability, particularly when the token experiences a moderate speculative increase.
The Expansion Layer disperses additional liquidity beyond the current market price, stretching across a vast range. Its purpose is to enable upward price exploration while methodically introducing new tokens into circulation, ensuring a controlled and gradual market expansion.
Calculating the BLV
Determining the Base Liquidity Value (BLV) is central to KnightNode’s market-making strategy and hinges on two key components: system capacity and the total tokens in circulation. Within KNC’s framework, 'system capacity' denotes the maximum volume of tokens that the liquidity tiers can support, while 'total tokens in circulation' refers to the sum of tokens not currently positioned within KNC’s liquidity tiers. To maintain the system's integrity, KNC adheres to a principle where the system capacity exceeds the total tokens in circulation before any liquidity distribution is executed.
The BLV is pinpointed by determining the maximum price point at which Baseline can allocate its liquidity tiers while still upholding its solvency rule. The process involves gradually augmenting the liquidity at successive price levels until the point where the system capacity is just sufficient to encompass the total tokens in circulation. Through this method, Baseline ensures it consistently purchases tokens in the most capital-efficient way, thereby reducing the likelihood of excess, idle liquidity within its ecosystem.
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