Liquidity depth

How it works

Depth measures capital deployed within a specific band, typically the dollar value of reserves at prices within 1%, 5%, or 10% of current. TVL is the total capital across all price levels. For a constant-product pool the two diverge sharply; for a concentrated position they converge inside the chosen range and fall to zero outside it.

In a v2 pool, the capital available to absorb a 10% price move is roughly 10% of total pool value, not 100%. A $1M v2 pool has about $100K of effective depth for a 10% move. A $200K v3 position concentrated in a 20% band delivers roughly the same effective depth, at one-fifth the capital.

Design consequence

Specify depth against a trade size and a slippage tolerance. The real question is: what is the largest single trade we expect, and how much price movement is acceptable for it? If the answer is $50K trades at 2% slippage, solve for the required depth with the AMM formula. That figure is the depth target the pool must hit before the TGE proceeds.

Example

A project expecting $1K-$10K trades needs roughly $500K of effective depth to hold a $10K trade at 2% slippage in a v2 pool. With only $100K of depth, every $10K trade takes 10% slippage, a hostile experience that suppresses volume and discourages liquidity providers.