Concentrated Liquidity Module that CremaFinance First Brings into the Solana Universe
Concentrated Liquidity Market Maker(CLMM) is a type of advanced market maker algorithm designed for Dex platforms. It allows liquidity providers to add liquidity in their specified price ranges, which dramatically improves the capital efficiency compared with previous market maker models in DeFi.
The most common algorithm adopted by current Dex platforms is AMM, the Automated Market Maker. The AMM follows the classic constant product equation x∗y=k. Assets are distributed evenly over the entire price curve. In the equation, k is a constant value while x and y are the liquidity of two corresponding tokens of the trading pool. All the liquidity added by liquidity providers in AMM is throughout the entire range of (0, ∞). It is simple but it also leads to a deep-rooted problem for AMM platforms, in which most liquidity in AMM is idle in the long term. A huge amount of assets in AMM only delivers a price that is still volatile.
Most traders only utilize the liquidity around the current market price and most liquidity providers’ fee revenue is also generated within the near-market-price range. This means that most users only need a smaller price range but flexible range settings, instead of always having the full price range. On Crema, liquidity providers are able to specify smaller price ranges that they desire and then allocate all their assets within those ranges. Only when the trading price of the pool drops into the range specified by a user, the liquidity added by that particular user will be traded. Having this mechanism means liquidity in each specific range only needs to work for its own range. Assets are therefore more concentrated and the capital utilization is more efficient as a result.
A user’s liquidity added in a specific price range is like an open position in a centralized exchange. In Crema’s CLMM pools, a user’s position only needs to contain enough assets X and Y to cover the price movement between the maximum and minimum of this position’s price range. When the price moves out of the price range of a position, this user’s position will turn into an inactive status. At that time, there will be only one type of asset left in that position. The other asset should have run out and all been exchanged to its paired token. Which asset is left depends on which side the price exits the range from. An inactive position will stop earning fees from users’ transactions. At the same time, those positions in ranges that contain the newest trading price will start working. As the price moves up and down, positions in different ranges work alternately. Aggregated and connected with each other, these positions of different ranges jointly achieve similar trading goals as what AMM does, but CLMM executes this with much higher market depth in each range. Besides, liquidity providers are naturally encouraged to add most of their liquidity centered around the current market price in order to earn more transaction fees. Therefore, the liquidity in CLMM will usually exist in a different distribution form.
The concentrated liquidity market maker gives much more flexibility to liquidity providers. LPs can open as many positions as they desire to meet their different needs. They can choose to inject their liquidity within a narrow range to control their liquidity cost to a relatively low level. In addition, they can conduct further actions on their positions according to the market change to maintain the active status of their positions to earn more fees.
CLMM Fees
After the above introduction, it’s easy to see that every liquidity position is different because they may have different price ranges and different liquidity amounts. For this reason, it is difficult to use the common LP tokens like AMM does as proof of a user’s liquidity provision. Crema uses NFT (non-fungible token) to record the information of users’ non-fungible liquidity positions in CLMM. Every liquidity provider will get a unique NFT for each position they create on Crema. Each NFT proves that a user has a liquidity position on Crema. If this NFT is transferred to others, it means that the liquidity bond with the NFT is also transferred to others.
Initially, there are three fee tiers on Crema, which namely are 0.05%, 0.3%, and 1%. Different fee tiers suit different trading pairs. 0.05% is suitable for those stablecoin pairs and pegged-asset pairs and 0.3% suits most mainstream trading pairs. For those emerging projects or unique trading pairs, 1% could be considered. During the early stage, Crema will decide the fee tier for its different trading pools to ensure stability and control the market risks, during which, only one fee tier will be supported for each pool. Later on, each trading pool could support multiple fee tiers and liquidity providers would be allowed to choose the percentage they prefer. Moreover, new fee tiers could be added in the future if it is approved by DAO.
About Crema Finance
Crema Finance is a powerful liquidity protocol built on Solana that provides superior performance for both traders and liquidity providers. It changes the Solana DeFi game by introducing a series of innovations to improve capital efficiency and trading depth.
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