CLMM is one of the hot keywords recently leading to the growth of many DeFi projects serving in this field, especially Yield Aggregators. Let’s explore Concentrated Liquidity Management and the investment opportunities for us!
Nội dung bài viết
What is Concentrated Liquidity Management (CLMM)?
Concentrated Liquidity Market Maker (CLMM) is an advanced algorithm designed for AMM DEX platforms, allowing liquidity providers to increase the liquidity of token pairs within specific price ranges.
In this model, LPs (liquidity providers) will provide liquidity with a deeper strategy because LPs will predict the specific price range where actual transactions occur, instead of providing liquidity for the entire price range from 0 to infinity.
When providing liquidity, LPs will receive fungible LP tokens. However, with the CLMM concentrated liquidity mechanism, LP positions will be represented by NFTs – representing the token pair, volume, and price range that users provide liquidity for.
This is a new liquidity provision model first used by Uniswap Ver3 version with a more efficient concentrated liquidity provision model. While with the old model before, liquidity provided from 0 -> infinity, so the profitability was not really effective.
Benefits and Limitations of Concentrated Liquidity Model (CLMM)
Benefits
For LPs
Liquidity providers will earn higher fees and rewards, resulting in significantly more efficient capital optimization compared to previous AMM models in DeFi, while reducing risk for initial capital.
This is illustrated by the following example:
Alice and Bob both want to provide liquidity in the ETH/DAI pool on a platform using the concentrated liquidity model (CLMM). Each person has $1 million. The current price of ETH is 1500 DAI.
Alice decides to deploy her capital over the entire price range (in the normal AMM mechanism). Alice needs to deposit 500,000 DAI and 333.33 ETH (total value of $1 million).
Instead, Bob uses the CLMM mechanism and only deposits money in the price range of $1,000 to $2,250. Bob needs to deposit 91,751 DAI and 61.17 ETH, with a total value of about $183,500. The remaining $816,500, Bob will invest in other ways.
Although Alice has invested 5.44 times more capital than Bob, both will earn similar fees, as long as the ETH/DAI price stays within the range of $1,000 to $2,250.
The liquidity of both Alice and Bob will be entirely in ETH if the price of ETH drops to zero dollars. However, Alice loses all her assets, while Bob only loses about 20% of his assets.
Source: Uniswap v3
For Traders
Higher liquidity around the actual price of the currency pair means that traders will perform exchanges with lower slippage costs.
For Projects
High liquidity is a prerequisite for developing more financial products in deeper areas such as derivatives (perpetual, options),…
Limitations
However, the concentrated liquidity model (CLMM) also has some limitations for LPs. Because when the price moves out of the predetermined price range, the user’s position will become inactive. Only when the trading price of the pool drops to the range specified by the user, will that liquidity be used.
Therefore, the benefit of concentrated liquidity is that capital is used more efficiently. The limitation of concentrated liquidity is that it is not suitable for tokens with high price volatility, because if the price falls below the provided range, that liquidity/capital will not be used.
DeFi trend addresses limitations of Centralized Liquidity Market Making (CLMM)
Due to the limitations of LPs not always being able to optimize profits from the fluctuating cryptocurrency market prices, while requiring a lot of technical know-how to continuously change liquidity provision strategies, some new DeFi projects have emerged to serve and support this need and are receiving a lot of attention from the community.
DeFi Yield Management protocols are receiving large inflows of funds to help inexperienced LPs earn the best possible interest rates from farming with the CLMM model.
Basically, these platforms will have vaults with liquidity pairs similar to those on normal AMM platforms, but the protocol will give users more options to provide liquidity with that token pair better. Especially with the CLMM model, yield aggregators can help users automatically rebalance their LP position to fit the current price of that token pair.
For example, for the WMATIC-ankrMATIC pair, the Active Yield Management Gamma platform will automatically rebalance the position when there is a strong fluctuation in one or two tokens at a specific price level. Therefore, LPs of the token pair are both concentrated and flexible according to the market.
Yield Aggregator platforms supporting CLMM
Gamma Strategies
This protocol is designed for completely decentralized, automatic, and flexible liquidity provision strategies. The main feature of Gamma is the Vault – a contract code that helps manage liquidity with its own strategy from the project team. Gamma Vault has been built on Uniswap, Quickswap, and Zyberswap, and more new dex projects are coming soon.
Unipilot
Similar to Gamma Strategies, Unipilot is also a yield management platform for LP pairs on Uniswap. The protocol is planning to expand support for LPs on both Quickswap and other platforms.
Algebra Finance
A DeFi platform that supports centralized liquidity, integrating liquidity on many dex platforms such as Thena, Quickswap, etc.
SteakHut
Stakehut is a yield management platform that supports traderbook for the AMM Trader Joe ver 2 platform. Users can use the platform to yield on many token pairs with attractive APR rates and more concentration than direct supply on Trade Joe.
Conclusion
In conclusion, CLMM is a model that helps AMMs and LPs optimize efficiency when providing liquidity. It also opens up new opportunities for yield management protocols to change strategies to serve the majority of user needs. Yield management platforms that can contribute a large portion of TVL to the largest AMM Dex exchanges in each current ecosystem may receive a lot of attention from the crypto community.
