The Development of AMM Technology in the Web3 Field ( AMM )

In the Web3 industry, products related to DeFi dominate the landscape. Among them, the automated market maker (AMM) serves as a key component and is an important force driving financial innovation in Web3. This article will introduce several important AMM implementations in the Solana ecosystem, aiming to provide references for the investment strategy choices of liquidity providers (LP).

Constant Product Market Maker ( CPMM )

CPMM is the most basic implementation of AMM, applied in multiple products. For example, in a trading platform that launched a constant product-based AMM, the supply of two tokens in the pool has a fixed product: X * Y = k.

When users add liquidity to the pool, the CPMM will automatically create a linked 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 Tokens will be destroyed.

The on-chain program of CPMM is developed using Anchor. During the swap operation, the status of the corresponding Token Account is modified by passing in the pool address, token address, etc., to complete the token exchange.

The specific amount of target tokens that can be exchanged is calculated using the constant product formula:

After the total amounts of TokenX and TokenY change, their product should remain constant. Through mathematical transformation, a formula for calculating the quantities of exchanged tokens can be obtained. It should be noted that this calculation does not include transaction fees, which have already been deducted in the preceding logic.

Concentrated Liquidity Market Maker ( CLMM )

CLMM is similar to the V3 version of a certain DEX, where each token pair has multiple fee tiers and corresponding pools can be created for each tier. It inherits concepts such as ticks, multiple fee tiers, and concentrated liquidity.

CLMM allows LPs to select a price range when injecting funds, and the funds will only be distributed within the selected range. LPs can provide unilateral liquidity, similar to limit orders in traditional finance, but must consider more risk points.

For pools with small price fluctuations, LPs tend to choose a smaller range; for pools with severe fluctuations, they tend to choose a larger range. This is to minimize the risk of the current price deviating from the selected range, which could lead to excessive impermanent loss.

Concentrated liquidity can improve the utilization of LP funds, but it also raises higher demands for the financial awareness of LPs. LPs need to actively manage liquidity, otherwise frequent fluctuations may lead to significant impermanent loss.

Dynamic Liquidity AMM ( DLMM )

DLMM is an AMM product launched by a certain platform and is a variant of V3. It introduces the concept of Bin, where the pool starts from a base price, and each small Bin step exists as a Bin. Transactions within the same Bin enjoy zero slippage, which can significantly increase trading volume and success rate.

In DLMM, the currently activated Bin has two tokens, while other Bins are distributed on both sides with only one token remaining. Price changes are achieved by switching the activated Bin.

DLMM provides three liquidity strategies:

1. Spot: Suitable for most pools, it is the simplest strategy.

2. Curve: Suitable for pools with very small price fluctuations, such as stablecoin pairs.

3. Bid Ask: Suitable for pools with large price fluctuations, requiring LPs to frequently adjust their positions.

Overall, AMM, as an important component of Web3 finance, promotes the development of decentralized finance through its unique mechanism. With technological advancements and ecosystem improvements, AMM is expected to play a greater role in the future, further changing the landscape of traditional finance.