The Core of Web3 Finance: Exploring AMMs in the Solana Ecosystem

In the current landscape of the Web3 industry, decentralized finance (DeFi) related products dominate the market. Among them, automated market makers (AMM) play a key role in driving innovation and change in the Web3 financial sector. This article will focus on several important AMM implementations within the Solana ecosystem, aiming to provide references for liquidity providers (LP) in choosing investment strategies.

Constant Product Market Maker (CPMM)

CPMM is one of the most basic implementations of AMM, applied in various DeFi products. Taking the constant product AMM launched by a certain trading platform as an example, its core principle is to maintain a fixed product of the supply of two tokens in the pool: X * Y = k.

When users add liquidity to the pool, the system will automatically create a related account for the user and issue LP Token to prove the user’s share in a specific pool. These LP Tokens will be destroyed when liquidity is withdrawn.

The on-chain program of CPMM is developed using Anchor. When performing token swaps, users trigger swap-related instructions. For example, if a user wants to exchange USDC for TRUMP, they can operate through the TRUMP-USDC pool.

During the trading process, the AMM of the Solana ecosystem modifies the status of the corresponding Token Account by directly interacting with the CPMM program, without needing to deploy new contracts for each trading pair like on Ethereum.

The core logic of CPMM is to keep the product of the total token amount unchanged before and after changes. Through mathematical transformation, a formula for calculating the number of target tokens that can be redeemed can be obtained. It is important to note that in actual calculations, the deduction of transaction fees must also be considered.

Concentrated Liquidity Market Maker (CLMM)

CLMM is another implementation of AMM, similar to the V3 version of certain DEXs. It allows for the creation of multiple pools with different fee tiers for each token pair. CLMM inherits concepts such as ticks, multi-fee tiers, and concentrated liquidity, but due to the characteristics of the Solana chain, there is no need to deploy a contract separately for each pool.

The characteristic of CLMM is that it allows liquidity providers to select a price range when injecting funds, and the funds are only distributed within the selected range. This mechanism enables LPs to provide unilateral liquidity, similar to limit orders in traditional finance.

For pools with smaller price fluctuations, LPs usually tend to choose a smaller price range; while for pools with significant volatility, they tend to opt for a larger range. The purpose of this is to avoid the current price straying from the selected range as much as possible and to reduce impermanent loss.

Although concentrated liquidity can improve capital utilization, it also places higher demands on LP’s financial knowledge and management capabilities. LP needs to manage their liquidity more actively to cope with the risks brought by market fluctuations.

Dynamic Liquidity Market Maker (DLMM)

DLMM is another AMM product based on the Uniswap V3 concept. It is similar to CLMM, allowing LPs to concentrate funds within a specific range near the current price, but it has innovations in its specific implementation and features.

DLMM introduces the concept of “Bin”, dividing the pool starting from the base price according to a fixed Bin step. When trades occur within the same Bin, traders can enjoy zero slippage, which helps to increase trading volume and success rates, theoretically bringing more profits to LPs.

In DLMM, the currently activated Bin contains two types of tokens, while other Bins are distributed on both sides, each containing only a single token. When the amount of tokens in the activated Bin changes, the system adjusts the activated Bin based on the actual situation, thereby driving price changes in the pool.

DLMM provides LPs with three strategies: Spot, Curve, and Bid Ask. The Spot strategy is suitable for most liquidity pools; the Curve strategy is more suitable for pools with low price volatility, such as stablecoin pairs; the Bid Ask strategy is suitable for pools with high price volatility, but requires LPs to frequently adjust their positions to respond to market changes.

Conclusion

AMM, as an important component of the Web3 financial sector, has driven the development of decentralized finance through its innovative mechanisms. With continuous technological advancements and an increasingly完善生态系统, AMM is expected to play a greater role in the future, further transforming the traditional financial landscape. For liquidity providers, a deep understanding of the characteristics and risks of different AMM mechanisms will help in formulating more reasonable investment strategies.