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As mentioned above, in a concentrated liquidity protocol, the liquidity added by a user within a custom price range can be referred to as a position or liquidity position.
The user will receive an NFT generated by the smart contract as proof of ownership of the position.
- A unique ID
- Pool address
- Position index in the pool
- Name of the position
- Item description
- NFT URL Lower tick index of the position
- Position's upper tick index
A liquidity provider must own the Position NFT in order to have the authority to collect the fees generated by the position and to earn the corresponding liquidity mining rewards. For certain pools, a Position NFT can also be staked to certain smart contracts to earn additional incentives.
In a concentrated liquidity protocol, only the liquidity in those positions with active price ranges could be used by transactions, thereby generating transaction fees. The transaction fee performance of a liquidity position reflects its effectiveness and contribution to the protocol. Therefore, one of the most unique features of Seil's liquidity mining is that it distributes its mining rewards to users according to their actual fee performance, rather than based on their liquidity amounts. This requires more active participation if a liquidity provider wants to earn more fees and mining rewards.
As mining rewards are released linearly, each time a new transaction is to be executed, the contract will be called to calculate the proportion of fees generated by each position to the total fees generated by the pool since the last call. The released rewards are distributed in proportion to the fees generated by each position.
This fee-based mining mechanism ensures that mining rewards are not diluted by those inactive LPs or users who deliberately allocate liquidity in an invalid price range just to share mining incentives. It significantly reduces the cost of incentivising liquidity for both the protocol and third party project owners, making the TVL of Seil more efficient than other DEXes.