Concentrated Liquidity Market Maker (CLMM)
(Redirected from Concentrated liquidity)
Concentrated Liquidity Market Maker (CLMM) pools that allow for liquidity concentration at specific price points. CLMM provides lower slippage for traders than traditional AMMs and higher fee earnings for LPs, though the risk of higher impermanent loss is magnified by this design.
- From RareSkills (23-12-2024):
"What if we could “remove” liquidity from the regions where we don’t expect trading to happen and add the liquidity into the expected region?
To use concrete numbers as an example, suppose we want our AMM to have high liquidity above the price of 0.99:1 (99 cents of Tether for one USDC) and below the price 1.01:1 (1.01 Tether for one USDC). Since we have a much larger liquidity in the price range where we expect the stablecoins to trade, we expect a significantly reduced price in that region. We reduced price impact for most trades without requiring more capital.
Of course, nothing is free. If the price wanders outside the [0.99, 1.01] boundary, then liquidity drops precipitously. To create a competitive pool, we need to set the boundaries optimally. It’s also not obvious that 0.99 and 1.01 are the optimal boundaries. Nor is it obvious that multiplying and dividing the liquidity by a factor of 10 is the right scale."
To understand how this works, specifically in Uniswap V3, read the full article here.
