Exploring the Solana Ecosystem AMM: In-depth Code Analysis of the High Liquidity Mechanism
In the Web3 industry, products related to DeFi dominate the landscape. Among them, automated market makers (AMM) serve as a key link and are an important force driving financial innovation in Web3. This article will introduce several important AMM implementations within the Solana ecosystem, aiming to provide references for investment strategy choices for liquidity providers (LP).
CPMM: Constant Product Market Maker
CPMM(Constant Product Market Maker) is one of the most basic implementations of AMM. Taking an AMM in the Solana ecosystem as an example, it is based on the constant product principle, which means that the product of the supply of the two tokens in the pool remains constant: X * Y = k.
When users add liquidity to the pool, the system will automatically create an associated account for the user's wallet and issue LP Tokens to prove that the wallet holds a share of the pool. When withdrawing liquidity, the corresponding LP Tokens will be destroyed.
The on-chain program of CPMM is developed using Anchor. In the swap operation, the system calculates the amount of the target token that can be exchanged based on the constant product formula. The calculation formula is:
Δy = (Δx * y) / (x + Δx)
Among them, Δy is the quantity of target tokens that can be exchanged, Δx is the quantity of input tokens, and x and y are the current quantities of the two types of tokens in the pool.
CLMM: Concentrated Liquidity Market Maker
CLMM(Concentrated Liquidity Market Maker) draws on the design concepts of a well-known DEX, introducing concepts such as ticks, multiple fee tiers, and concentrated Liquidity. Unlike CPMM, CLMM allows LPs to select a price range when injecting funds, with funds distributed only within the chosen range.
CLMM supports single-sided liquidity provision, similar to limit orders in traditional finance. For pools with small price fluctuations, LPs tend to choose a smaller price range; for pools with significant volatility, they tend to choose a larger range to reduce the risk of impermanent loss.
Although concentrated liquidity can improve capital utilization, it also places higher demands on LP's financial management capabilities. LPs need to manage their liquidity more actively to cope with market fluctuations.
DLMM: Dynamic Liquidity Market Maker
DLMM(Dynamic Liquidity Market Maker) is another implementation of a centralized liquidity AMM. It introduces the concept of "Bin", dividing the price range into multiple small segments. Trades within the same Bin can enjoy zero slippage, which is beneficial for increasing trading volume and success rate.
The token distribution in DLMM is on both sides of the current price, with the active Bin containing two types of tokens, while other Bins only contain a single token. When a certain token in the active Bin is exhausted, the system will automatically switch to the adjacent Bin, thereby driving the price change of the pool.
DLMM provides LPs with three strategies:
Spot: Suitable for most liquidity pools, it is the most basic strategy.
Curve: Suitable for pools with small price fluctuations, such as stablecoin pairs.
Bid Ask: Suitable for pools with large price fluctuations, requiring LPs to frequently adjust their positions.
Summary
AMM, as a core component of the Web3 financial sector, promotes the development of decentralized finance through innovative mechanisms. With technological advancements and ecological improvements, AMM is expected to play a greater role in the future, further changing the landscape of traditional finance. For LPs, understanding the characteristics and principles of different AMMs can help formulate better investment strategies and achieve better returns in the DeFi market.
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LiquidityHunter
· 07-07 17:25
I found an abnormal liquidity gap while checking defi data in the middle of the night.
View OriginalReply0
AirdropHunterWang
· 07-07 12:10
This thing is really too complicated.
View OriginalReply0
MetaverseHermit
· 07-07 05:21
One person looks dizzy...
View OriginalReply0
Layer2Arbitrageur
· 07-05 10:36
meh, clmm still loses 40bps to mev... do better sol
Reply0
StakeTillRetire
· 07-04 18:19
Just go for it
View OriginalReply0
MissedAirdropBro
· 07-04 17:57
Those who don't play AMM's LP have all missed out.
In-depth Analysis of Solana Ecosystem AMM Mechanisms: Comparison of CPMM, CLMM, and DLMM Liquidity Strategies
Exploring the Solana Ecosystem AMM: In-depth Code Analysis of the High Liquidity Mechanism
In the Web3 industry, products related to DeFi dominate the landscape. Among them, automated market makers (AMM) serve as a key link and are an important force driving financial innovation in Web3. This article will introduce several important AMM implementations within the Solana ecosystem, aiming to provide references for investment strategy choices for liquidity providers (LP).
CPMM: Constant Product Market Maker
CPMM(Constant Product Market Maker) is one of the most basic implementations of AMM. Taking an AMM in the Solana ecosystem as an example, it is based on the constant product principle, which means that the product of the supply of the two tokens in the pool remains constant: X * Y = k.
When users add liquidity to the pool, the system will automatically create an associated account for the user's wallet and issue LP Tokens to prove that the wallet holds a share of the pool. When withdrawing liquidity, the corresponding LP Tokens will be destroyed.
The on-chain program of CPMM is developed using Anchor. In the swap operation, the system calculates the amount of the target token that can be exchanged based on the constant product formula. The calculation formula is:
Δy = (Δx * y) / (x + Δx)
Among them, Δy is the quantity of target tokens that can be exchanged, Δx is the quantity of input tokens, and x and y are the current quantities of the two types of tokens in the pool.
CLMM: Concentrated Liquidity Market Maker
CLMM(Concentrated Liquidity Market Maker) draws on the design concepts of a well-known DEX, introducing concepts such as ticks, multiple fee tiers, and concentrated Liquidity. Unlike CPMM, CLMM allows LPs to select a price range when injecting funds, with funds distributed only within the chosen range.
CLMM supports single-sided liquidity provision, similar to limit orders in traditional finance. For pools with small price fluctuations, LPs tend to choose a smaller price range; for pools with significant volatility, they tend to choose a larger range to reduce the risk of impermanent loss.
Although concentrated liquidity can improve capital utilization, it also places higher demands on LP's financial management capabilities. LPs need to manage their liquidity more actively to cope with market fluctuations.
DLMM: Dynamic Liquidity Market Maker
DLMM(Dynamic Liquidity Market Maker) is another implementation of a centralized liquidity AMM. It introduces the concept of "Bin", dividing the price range into multiple small segments. Trades within the same Bin can enjoy zero slippage, which is beneficial for increasing trading volume and success rate.
The token distribution in DLMM is on both sides of the current price, with the active Bin containing two types of tokens, while other Bins only contain a single token. When a certain token in the active Bin is exhausted, the system will automatically switch to the adjacent Bin, thereby driving the price change of the pool.
DLMM provides LPs with three strategies:
Summary
AMM, as a core component of the Web3 financial sector, promotes the development of decentralized finance through innovative mechanisms. With technological advancements and ecological improvements, AMM is expected to play a greater role in the future, further changing the landscape of traditional finance. For LPs, understanding the characteristics and principles of different AMMs can help formulate better investment strategies and achieve better returns in the DeFi market.