# Market Making

To understand how [Baseline](https://www.baseline.markets/#Features) works, it's important to understand the mechanics of [Uniswap V3](https://blog.uniswap.org/uniswap-v3) (pool mechanics and concentrated liquidity positions). We've got a great [Primer on Uniswap V3 ](https://prospect-labs.gitbook.io/prospect/resources/uniswap-v3-primer)in our [Resources](https://prospect-labs.gitbook.io/prospect/resources) section.

At launch, the $CHAMP supply is distributed into a [Uniswap V3](https://blog.uniswap.org/uniswap-v3) concentrated liquidity pool consisting of 3 positions: **Floor Position**, **Anchor Position** and **Discovery Position**. 

* **Floor Position**: supplies reserve liquidity to the pool and sits at the bottom of the order book, concentrating liquidity into a tight range. The base position exists to defend the price of $CHAMP during periods of heavy selling and the lowest price it defends is the Baseline Value (BLV).
* **Anchor Position**: supplies reserve liquidity from the $CHAMP BLV to the current market price in a wide range. The anchor position exists to support liquid trading conditions for $CHAMP even if a healthy speculative premium emerges. 
* **Discovery Position**: supplies new $CHAMP liquidity into the pool from the current market price onwards in a wide range. The discovery position exists to facilitate upside price discovery and responsibly distributes supply into the market.

<figure><img src="https://2813571941-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2Fi38WXnt1syJKESJsb1bL%2Fuploads%2FepEAC6cORGh12UyI5XeV%2Fliquidity_structure.95d29d94.png?alt=media&#x26;token=8dcddec7-bea4-4216-8d02-af5d846b328e" alt=""><figcaption></figcaption></figure>

[Baseline](https://www.baseline.markets/#Features) market making accounting revolves around two metrics: the system **capacity** and the $CHAMP total **floating supply**. Capacity refers to the total amount of $CHAMP that can be absorbed by the liquidity structure and floating supply refers to all the $CHAMP that exist outside of the [Baseline](https://www.baseline.markets/#Features) liquidity position. In order to assure solvency for all tokens, [Baseline](https://www.baseline.markets/#Features) ensures that **capacity > floating supply** each time it deploys liquidity.&#x20;

To rebalance liquidity, the protocol uses three rebalancing strategies `sweep()` , `slide()`and `bump()` to help prevent extreme market movements, ensuring a balance and secure environment for traders.

### `sweep()`when prices increase

The first rebalancing strategy, called `sweep()`is triggered when the token’s price increases beyond a certain threshold. The strategy does three things:

1. Pulls Anchor and Discovery Position from [Uniswap V3](https://blog.uniswap.org/uniswap-v3) pool.
2. Moves some of the ETH liquidity from the Anchor Position to the Floor Position.
3. Attempts to increase the floor price of the token by calculating whether the protocol can buy back all circulating tokens at a higher price.
4. Redeploys a new Anchor Position with extra ETH liquidity.

Step 3 not only ensures that protocol has enough reserves to buy back every token, it also increases the floor price in the process. This is what we mean when we say “using profits to increase its value over time”.

{% hint style="info" %}
**Trading Tip**: At high market prices, the sweep() function realizes greater liquidity surpluses, increasing the likelihood of a BLV bump.
{% endhint %}

### `slide()` when prices decrease

The second rebalancing strategy, called `slide()`, is triggered when the token’s price decreases beyond a certain threshold. This strategy simply "slides" the Discovery Position back towards the market price, condensing the Anchor Position. Once enough liquidity surplus has been gathered, bump() attempts to increase the BLV price of the token by calculating whether the protocol can buy back all circulating tokens at a higher price.

{% hint style="info" %}
**Trading Tip:** Liquidity becomes progressively thinner as the market price approaches the BLV, encouraging greater volatility.
{% endhint %}

### `bump()` is called to raise the BLV

Once enough liquidity surplus has been gathered, `bump()` attempts to increase the BLV price of the token by calculating whether the protocol can buy back all circulating tokens at a higher price.

{% hint style="info" %}
**Trading Tip:** When the BLV price increases, holders can access additional borrowing capacity.
{% endhint %}

***

Baseline docs

Market Making – Baseline

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