Concentrated Liquidity Market Maker

Concentrated Liquidity Market Maker (CLMM), liquidity providers (LPs) can concentrate their funds within specific price ranges in the liquidity pool. This empowers LPs with enhanced capital efficiency and greater control over their liquidity provision.

1) What’s the difference between β€œAMM” and "CLMM"?

For Non-Technical guys:

To illustrate the concept in simpler terms, consider the following scenario involving Alice and Bob, each with $1000 in the ETH-USDC pair, where the current ETH price is $2000.

  • In the previous version of DackieSwap, called AMM, Alice provides liquidity with $500 in ETH and $500 in USDC

  • While Bob decides to use DackieSwap's CLMM feature and also provides $500 in ETH and $500 in USDC. However, Bob predicts that the ETH price will remain between $1700 and $2300 over the year, so he sets his liquidity price range accordingly.

At the end of the year, the ETH price is $2100. As a result, Alice earns a liquidity fee of $50 (5% APR), whereas Bob earns $300 in liquidity fees (30% APR). This discrepancy arises because the ETH price remained within Bob's specified price range for liquidity provision, making Bob's liquidity utilization far more efficient compared to Alice's approach in the old version of DackieSwap.

For Technical guys:

The following image provides a simple comparison between CLMM and traditional AMM concerning liquidity provision.

2) The Benefits of CLMM

  • Concentrated Liquidity: allowing LP to concentrate their funds within specific price ranges. This enables them to optimize capital efficiency and reduce exposure to impermanent loss.

  • Customizable Fee Tiers: the AMM version of DackieSwap fixed 0.3% fee for all trades, DackieSwap CLMM allows LP to set different fee tiers for different price ranges. This provides greater flexibility in fee structures and can attract LP with diverse strategies.

  • Range Orders: enable traders to specify the price range they want to execute their trades. This feature allows for more precise and efficient trading, especially in volatile markets.

  • Capital Efficiency: With the ability to concentrate liquidity within specific price ranges, DackieSwap CLMM offers improved capital efficiency compared to AMM version. LP can effectively deploy their assets and maximize returns in the areas they deem most profitable.

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