1. Dynamic Liquidity Market Maker
Last updated
Last updated
Our newest dynamic liquidity protocol is our DLMM, a new form of concentrated liquidity AMM on Solana, developed to make it easier and more sustainable for users and project teams to provide broader, deeper liquidity on Solana. We aim to improve LP profitability with dynamic fees, allow new tokens to bootstrap their liquidity in new creative ways, and allow LPs a broader array of LP strategies and more precise liquidity concentration.
The DLMM consists of discrete zero-slippage price bins, each of which holds liquidity for a specific price range. Reserves deposited in a liquidity bin are made available for exchange at the price defined for that bin. Swaps that happen within the same price bin do not suffer from slippage. The market for the asset pair is established by aggregating all the discrete liquidity bins.
Zero-slippage bins offer even greater concentration than a uniswap v3 model by allowing LPs to provide deep levels of liquidity at a precise price point. Additionally, LPs can create richer LP strategies by creating liquidity shapes.
Additionally, the bin-based model opens the door for dynamic fees where the fees increase during high market volatility which is tracked when trading changes the active price bin. This increases LP profitability for volatile trading pairs where overcoming IL has always been challenging for LPs, especially without farming rewards.
DLMMs offer a number of benefits over traditional automated market makers (AMMs):
Reduced slippage: By concentrating liquidity in a specific price range, DLMMs reduce the amount of slippage that traders experience.
Improved capital efficiency: DLMMs allow liquidity providers to deposit their assets into specific price bins, which makes better use of their capital.
Deeper liquidity: DLMMs can provide deeper liquidity for asset pairs, even those with low trading volume.
Improved LP profitability: Dynamic fees allow LPs to make more money on market volatility
High Capital Efficiency: DLMM allows LPs to precisely concentrate their liquidity beyond just a price range by creating liquidity shapes that can better map their liquidity to the price movement, which makes greater use of their capital. This is because DLMM can support high-volume trading with low liquidity requirements. In the future, LPs can earn lending yield on capital in unused bins, further increasing capital efficiency.
Zero Slippage: Trading within an active bin has zero slippage or price impact. This makes it easier for LPs to concentrate their liquidity even further and capture more volume and fees than they could before.
Dynamic Fees: LPs earn dynamic swap fees during high market volatility to compensate for impermanent loss. This is because the fees charged on swaps increase with volatility, which helps to offset the losses that LPs can experience in volatile markets.
Flexible Liquidity: LPs can build flexible liquidity distributions according to their strategies. For example, an LP could concentrate their liquidity in a narrow price range around the current market price to minimize slippage, or they could spread their liquidity across a wider price range to reduce effects of impermanent loss.
New Creative Ways to Launch Tokens: DLMM opens up new creative ways for project teams to launch their tokens. For example, a project team could use DLMM to implement a bonding curve, which is a type of token sale mechanism that rewards early buyers.
Flexible Token Design: Project teams can design their own bonding curves depending on how they plan to sell their tokens. For example, a project team could use a bonding curve to sell tokens and use the funds there to support a minimum token buyback price guaranteeing a token floor price.
Organic Liquidity Growth: DLMM can help project teams organically grow liquidity for their tokens. For example, a project team could use DLMM to create a liquidity incentive program that rewards LPs for providing liquidity to their token pair.
Overall, DLMM offers several benefits to both LPs and project teams. For LPs, DLMM can improve capital efficiency, reduce slippage, and improve profitability. For project teams, DLMM opens up new creative ways to launch tokens, allows for flexible token design, and can help to organically grow liquidity for their tokens.
