Concentrated Liquidity Market Maker
Concentrated Liquidity Market Makers (CLMM) is a new type of Automated Market Maker. It explains how CLMMs enhance the efficiency of decentralized exchanges and provide yield for liquidity providers. It also highlights the differences between CLMMs and other AMMs and why they are a potential game changer for DeFi participants seeking capital efficiency and deep liquidity.
When LPs provide liquidity on a CLMM, they can choose the price range where they would like their tokens allocated, for example, from $20-$30. This range is broken down into “ticks,” where liquidity is distributed equally.
For instance, in the range of $20-$30, there could be a tick for $21 tokens, $22 tokens, and so on. The tokens remain supplied in these ticks until they are withdrawn, and an LP cannot receive fees if the market value of the tokens they’ve supplied moves outside their set range.
Tokens provided on a CLMM are not spread out across a massive price range and instead are supplied at or around the current market value of a token, so capital efficiency is increased exponentially compared to first-generation AMMs. With a CLMM, it no longer takes 1,000 tokens to supply 10 tokens at the current token price. For LPs, 10 tokens deposited in a CLMM can return the same yield as 1,000 tokens inefficiently deployed from zero to infinity.
Allocating liquidity more efficiently is a technological advantage for LPs, traders, and projects. LPs can collect more fees earned with fewer tokens deposited (that can be used to earn yield elsewhere in DeFi), traders can experience less slippage, and projects can more efficiently realize deep liquidity for their tokens without having to deploy capital that could be used elsewhere for growth.