Concentrated Liquidity Market Makers (CLMM) vs. Automated Market Makers (AMM)
Have you ever heard of an Automated Market Maker (AMM)? If you have ever participated in decentralized finance, you probably used one without realizing it. AMMs are smart contracts allowing users to swap tokens on decentralized exchanges without trusting intermediaries like banks or centralized exchanges. In AMMs, tokens are swapped between liquidity pools where liquidity providers (LPs) provide assets in exchange for liquidity rewards/yield opportunities. Traditional AMMs, however, have an inefficient token allocation system, spreading liquidity equally between the current and non-current prices. This system results in high slippage and low capital efficiency for liquidity providers whose tokens are used to facilitate these swaps.
Alternatively, a new type of AMM is designed to benefit the liquidity providers rather than the arbitrage bots claiming most of today’s value in DeFi. CLMMs Concentrated Liquidity Market Makers are a new generation of automated market makers (AMMs) aiming to improve decentralized exchanges’ capital efficiency and provide attractive yield opportunities for liquidity providers. CLMMs, focus on providing deep liquidity at the current market price, which reduces slippage and improves capital efficiency. This system allows the LPs’ capital to be deployed more efficiently, benefiting the LP and the project whose liquidity is being managed.
ICHI is an example of a Concentrated Liquidity Market Maker (CLMM) that aims to improve the capital efficiency of decentralized exchanges and provide better yield opportunities for liquidity providers. Unlike traditional automated market makers (AMMs) that spread liquidity across a price range from 0 to infinity, ICHI’s CLMM algorithm concentrates the liquidity in the price range where most trades occur, making the most of the deposits. This reduces slippage and improves capital efficiency for LPs, allowing them to earn greater rewards for their deposited assets. In addition, by designating liquidity for trades within a specific price range, LPs can make their assets work harder for them and maximize their returns.
To learn more about participating in CLMMs, check out ICHI’s Vaults on app.ichi.org.
