Meteora’s DLMM draws inspiration from Trader Joe’s Liquidity Book and employs a system of discrete price bins to manage liquidity for asset pairs. Within each bin, reserves are allocated for exchange at specified prices, effectively preventing slippage within the bin. The collective liquidity in these individual bins determines the overall market for the asset pair.
DLMM offers LPs the opportunity to generate profits through liquidity provision fees, which can vary dynamically based on market volatility. Additionally, LPs may also qualify for LM rewards where applicable.
This new protocol enhances liquidity provision on Solana by introducing a concentrated liquidity AMM. With dynamic fee structures, DLMM aims to increase LP profitability, facilitate innovative token liquidity bootstrapping, and provide a broader range of LP strategies with precise liquidity concentration.
DLMM’s zero-slippage price bins enable LPs to concentrate liquidity more effectively compared to Uniswap v3 models. This allows for deep liquidity provision at specific price points and enables LPs to devise more advanced strategies by shaping liquidity. Furthermore, DLMM’s bin-based model supports dynamic fees, enhancing profitability during periods of heightened market volatility. This addresses the challenge of impermanent loss for LPs in volatile trading pairs, especially in the absence of farming rewards.
It offers liquidity providers (LPs) the advantage of dynamic fee structures and real-time precision in liquidity concentration.
- Less slippage: DLMMs focus liquidity in a set price range, cutting down on trader slippage.
- Better capital use: With DLMMs, liquidity providers can target specific price bins, maximizing capital.
- More liquidity: DLMMs offer deeper liquidity, even for less active assets.
- Boosted LP earnings: Dynamic fees mean LPs can rake in more cash when markets get volatile
Let’s break it down. Concentrated Liquidity Market Makers (CLMMs), like Uniswap V3, Raydium, and Orca, allow you to focus your capital on specific price ranges for tokens. For instance, you can provide liquidity for a USDC:USDT pair only between $1 to $1.002.
With tighter ranges, your capital is used more efficiently, resulting in higher fee earnings. This is especially beneficial for stablecoin pairs that typically stick close to a 1:1 ratio.
However, if token prices move outside your chosen range, you stop earning fees because you’re not providing liquidity effectively anymore.
Sure, you could spend your day watching the screen and adjusting your capital manually. But there’s a simpler and more profitable way that allows you to step away and enjoy other activities.
CLMMs improve on the traditional AMM model by letting liquidity providers pick specific price ranges to allocate their capital. This boosts capital efficiency and flexibility for everyone involved.
With efficient liquidity allocation, traders can easily swap assets with minimal impact on prices and slippage. Liquidity depth refers to how much liquidity is available for trading. The more liquidity concentrated around a price, the less impact a trade has on that price, reducing slippage. So, the algorithm benefits both liquidity providers (LPs) and traders.
Concentrated liquidity allows users to choose specific price ranges for providing assets, offering diverse strategies like hedging and limit orders. Liquidity providers gain efficiency and revenue, while traders benefit from reduced costs. However, users must consider potential outcomes, and understanding these features is crucial for maximizing benefits in decentralized finance’s future.
Dynamic Liquidity Market Makers (DLMMs) like Meteora give you more control. Remember how with CLMMs, you set a range for your capital? DLMMs lets you decide how to spread your money within that range.
For instance, suppose you think SOL will stay around $100, moving between $95 and $105. You’d want most of your money at $100, right? DLMMs let you do just that.
When SOL prices are close to $100, where most of your money is, you earn more fees. But what if the prices move away? Do you earn less? Not necessarily.
Meteora DLMMs use dynamic fees. This means when the market is volatile, you earn higher fees to offset any losses you might have.
This leads to a great cycle of benefits. How?
- Higher fees during volatility attract more liquidity providers.
- Less price impact for traders swapping tokens.
- More volume because more swaps occur.
- More fees are earned for liquidity providers (LPS).
Everyone benefits! But remember, there’s still a risk of impermanent loss. This occurs if the relative price of the assets changes after you deposit them. If you’re considering becoming a liquidity provider, it’s essential to understand impermanent loss thoroughly!
— — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — —
Firstly, LPs enjoy increased capital efficiency and higher fees.
Secondly, More trading activity and fees are generated because there’s no slippage within each bin, which significantly lowers the impact on prices.
— — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — —
DLMM, akin to CLMMs, enables LPs to manage high-volume trading with minimal capital by allowing them to set a price range and concentrate tokens around the current market price.
However, DLMM offers a significant enhancement over CLMMs with the introduction of zero-slippage price bins. Unlike CLMMs, where slippage occurs, DLMM organizes liquidity into distinct price bins, ensuring that reserves in each bin can be exchanged at the defined price without any slippage.
This means that trading within an active bin has zero slippage or price impact, resulting in significantly higher trading volumes through DLMM.
- The active price bin holds reserves of both token X and Y. Bins to its left contain only token Y, while those to the right contain only token X. Only one bin can be active at a time, earning trading fees.
- Each bin allows liquidity to be exchanged at a fixed price, ensuring zero slippage swaps within it.
- Trades add one token and remove the other until only one type of token remains in a bin, causing the active bin to shift left or right.
- Except for the active bin, all bins contain only one type of token, as one token has been depleted or awaits use.
- The difference in price (in basis points) between consecutive bins is the bin step. It determines how much the price must move for the active price point to shift to the next bin. A larger bin step widens the maximum price range but may have benefits.
- The market for the token pair is determined by aggregating all discrete liquidity bins.
What does this mean for LP fees?
This means LPs can potentially earn more fees using the same or fewer tokens, especially for stable pairs with low volatility.
LPs can review all available price bins around the active bin, selecting precise price points to provide liquidity and adjust liquidity depth. With zero-slippage bins, LPs can concentrate liquidity more effectively to maximize capital efficiency and capture more volume and fees compared to CLMMs.
This is particularly beneficial for stable token pairs with tight trading ranges. For instance, in the USDC/USDT pair trading around $0.99 — $1.01, liquidity outside this range may not earn fees. By concentrating liquidity within the active bin at $1, LPs optimize volume capture and fee earnings.
In a less concentrated position with a wider price range, only a small amount of SOL is utilized in the active bin. In contrast, a more concentrated position with a narrower price range utilizes more SOL in the active bin, resulting in higher volume and fees.
In the future, DLMM may integrate Dynamic Vaults, allowing LPs to earn a lending yield on capital in unused bins, further enhancing capital efficiency.
— — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — —
Firstly, LPs have more flexibility and control over efficiently distributing liquidity.
Secondly, Opens up more chances to earn higher fees depending on market conditions and LP preferences or risk tolerance.
— — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — —
Capital deployment isn’t limited to the curve example provided earlier. You have the autonomy to design and execute your own strategies, allowing for greater flexibility and customization in how you allocate your resources.
1. Spot
In simple words, spot liquidity offers a consistent spread of assets, which works well in any market. It’s the easiest strategy for new liquidity providers who don’t want to adjust their positions daily. Think of it like setting a price range with CLMM.
Let’s say you believe SOL prices will stay between $82 and $85 over the next 5 days. You can add liquidity to a SOL/USDC pool using a Spot strategy. Set your range slightly wider, like $81.90 to $85.86 per SOL, with a buffer. With 60 bins, you’ll cover a wider range to earn steady fees, and you might only need to adjust your position every 5 days.
2. Curve
Perfect for a focused strategy aiming to optimize capital efficiency by mainly allocating capital in the middle of your price range. This works well for stable assets or pairs with infrequent price changes.
Imagine you think the crypto market will go down in the next 2 weeks, so you want to stick to stablecoins. You decide to put your money into a pool that combines USDC and USDT to earn fees. Since this pool is usually stable, you choose a narrow range, like 0.998500 to 1.003904 USDC for each USDT (around 35 bins), expecting the price to stay close to the middle. With the current price at 1.000901 USDC for each USDT, if the price moves away from the middle, less money will be put in each section of the range.
3. Bid-Ask
Bid-Ask is a strategy where most of your money is put toward the extremes of a price range. It’s useful for catching big price swings away from the current price. While Bid-Ask is more complicated than Spot and may need adjusting more often to work well, it can capture lots of fees when prices are changing a lot. You can also use Bid-Ask just on one side for a strategy where you’re slowly buying in or selling out.
Let’s say you’re equally positive about BONK and SOL and don’t mind holding either for a while. You also notice that BONK/SOL prices tend to swing a lot within a certain range. In this case, you might think about using a Bid-Ask strategy. Here, most of your money is spread towards both ends of the price range, with the lowest price set at 0.00000005 and 0.0000001 SOL per BONK. As BONK prices move away from the middle, more of your investment is used, and you’ll buy or sell BONK or SOL (depending on the price direction) at a faster rate. Just keep in mind that with this strategy, you might need to adjust your investment more often, maybe every 2–3 days.
4. Special use case: Single-sided Liquidity Position
If you only want to use one token to start providing liquidity, DLMM lets you do that with a single-sided position. You might do this to slowly buy the other token in the pair over time, especially if you think its price will drop. Essentially, you’re selling one token for the other gradually. You can pair single-sided positions with any volatility strategy (Spot, Curve, Bid-Ask) you prefer.
Let’s say you have USDC and want to buy SOL. The current SOL price is 100 USDC per SOL. You anticipate the SOL price to drop to 95 USDC over the next week and plan to buy more SOL as it becomes cheaper. You can disable “auto-fill”, add USDC only, and set your price range from 95 to 100 USDC per SOL. Keep in mind, that you can’t set a range beyond the current active price (e.g. 100 USDC), as only SOL liquidity can be added on the other side. Choose your volatility strategy; in this case, we’ll use Spot for an even distribution. As the SOL price falls, your USDC will be used to buy more SOL. When the SOL price reaches your minimum of 95 USDC, all your USDC will have been used, and your position will have only SOL.
Why Meteora’s DLMM is the smartest way to provide liquidity on Solana:
- LPs can choose their volatility strategy, giving them control to optimize earnings.
- They can select precise price points and allocate tokens accordingly, shaping their liquidity model to suit their strategy.
- For LPs who understand the market and deploy the right strategy, DLMM offers high capital efficiency and higher fees.
- If the price moves outside your set range, your position becomes inactive, and you stop earning fees. You can wait for the price to return or rebalance by adjusting your position.
— — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — —
Firstly, Fees adjust based on market volatility, helping LPs offset losses during turbulent times and boosting overall profitability.
— — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — —
As an LP, you face the risk of impermanent loss (IL), which occurs when the value of your tokens in a pool is less than if you held them separately. For example, if you provide liquidity to an A/B pool and the value of token A rises compared to token B, you’ll end up with more B and less A.
If the combined value of your tokens in the pool is lower than if you held them separately, you’ve experienced IL. This loss is “impermanent” because it’s realized only when you withdraw your liquidity. DLMM combats IL with dynamic fees, increasing during high volatility to boost returns and decreasing during low volatility to encourage trading volume and fee generation.
Dynamic fee has 2 components — Base fee and Variable fee
- Base Fee: The market’s base fee, set by the pool creator, is determined by the bin step (difference in basis points between consecutive bins) and the base factor, which amplifies the bin step for adjusting base fees.
- Variable Fee: The variable fee is influenced by market volatility, affected by swap frequencies and swaps spanning multiple bins. Fees are calculated and distributed per bin, ensuring equitable fee distribution among LPs for each crossed bin.
What does this mean for LP fees?
Dynamic fees adjust based on market volatility, reducing the impact of impermanent loss (IL) and improving LP profitability. This is particularly beneficial for volatile trading pairs, where IL is higher, making it challenging to overcome without farming rewards.
For liquidity protocol
- High Capital Efficiency: DLMM empowers LPs to precisely concentrate their liquidity, optimizing their capital usage by creating liquidity shapes tailored to price movements. This ensures efficient utilization of capital resources, allowing for high-volume trading with minimal liquidity requirements. Additionally, LPs have the potential to earn lending yield on unused capital, further enhancing capital efficiency.
- Zero Slippage: Trading within an active bin guarantees zero slippage or price impact. This enables LPs to concentrate liquidity more effectively, capturing increased volume and fees without experiencing slippage.
- Dynamic Fees: DLMM offers LPs dynamic swap fees that adjust during periods of high market volatility. This dynamic fee structure helps mitigate impermanent loss by increasing fees in volatile markets, compensating LPs for potential losses.
- Flexible Liquidity: LPs have the flexibility to customize their liquidity distributions to align with their strategies. They can choose to concentrate liquidity in a narrow price range to minimize slippage or distribute it across a wider range to mitigate impermanent loss effects.
For Teams
- Innovative Token Launch Options: DLMM offers project teams innovative methods to launch their tokens. For instance, teams can employ DLMM to implement bonding curves, a token sale mechanism that incentivizes early adopters.
- Customizable Token Structures: Project teams have the flexibility to design bonding curves tailored to their token sale strategies. For instance, teams can set up bonding curves to sell tokens and allocate funds to establish a minimum buyback price, ensuring a stable token floor price.
- Organic Liquidity Expansion: DLMM facilitates the organic growth of liquidity for tokens. For example, project teams can leverage DLMM to establish liquidity incentive programs, rewarding LPs for providing liquidity to their token pairs.
When you visit the DLMM pools page, you’ll find a list of the pools we currently offer. They’re usually arranged by how much trading happens in them and the fees they charge. So, the pools at the top tend to make the most fees.
In simpler terms, traditional liquidity pools aren’t very efficient with capital. Price impact occurs when a large portion of tokens from the pool are traded, causing slippage. To decrease slippage, we need more tokens in the pool, known as deep liquidity. However, much of the capital sits idle most of the time. It’s only really active during intense buying or selling, which can lead to impermanent loss if you’re better off just holding the tokens. So, what’s the solution?
Alright, let’s simplify that. When you see the 24-hour fee over TVL, like 1.04%, it doesn’t mean that’s your annual percentage rate (APR). It means, on average, the pool earns about 1.8% per day. So, if you want to figure out the APR, you’d multiply that by 365 days, which would be around 680%. And remember, this is just an average. Some liquidity providers (LPs) make even more. In general, the more active you are as an LP, the more you can earn.
DLMM offers some really cool features that you won’t find in any other AMM on Solana yet. One of these is the dynamic fee system. Here’s how it works: When the price of assets in the pool becomes more volatile or changes rapidly, the fee in the pool goes up. What does this mean for you as a liquidity provider (LP)? It means you can earn more fees when the market is more active and prices are moving around a lot. This also means that traders generally experience less impact on prices. In this pool, the base fee is 0.05%, but it can go up to a maximum of 10%. So far, since midnight, we’ve collected around $3,500 in fees.
Upon navigating to the designated tab, liquidity addition becomes accessible. Opting for a balanced deposit, I’ll evenly allocate holdings between SOL and USDC. Noticeably, liquidity distribution within the DLM diverges from conventional norms. A distinctive feature of our DLM lies in its organization into zero-slippage bins. Each bin corresponds to a specific price point, allowing users to specify liquidity depth accordingly. This precision enables concentrated liquidity deployment, presenting a myriad of LP strategies. Volatility strategy — Spot, Curve, Bid Ask has been explained in detailed above.
Manipulating the bars allows you to finely tune liquidity concentration within a specific price range, offering the potential for substantial increases in fee generation. However, it’s crucial to remain vigilant regarding price movements that extend beyond this designated range.
The gray bar serves as a visual representation of the entire pool’s liquidity distribution across the displayed range, showcasing variations in liquidity levels. It’s noteworthy that this liquidity distribution isn’t confined to the current market price and isn’t restricted to being two-sided, providing flexibility in liquidity orientation.
Additionally, users have the option to input custom values for both the minimum and maximum price, allowing for precise control over the liquidity range. By tailoring these parameters to specific market conditions and trading preferences, LPs can further optimize their liquidity provision strategy for enhanced effectiveness and profitability.
This is the perfect space for experimentation, where you can explore and fine-tune various settings to suit your preferences. It’s a dynamic environment where you’re encouraged to engage and enjoy the process, knowing that your input will lead to a personalized and enjoyable experience. After all, finding the perfect configuration is subjective and part of the fun! 🔍💡
Watch the Mr Bean style Video how I fine-tuned my DLMM📹🎉
Watch the Mr Bean style Video how to take a trade with DLMM🎉
Here you can see the real action in the balance and the fee updates.
The final episode of my Mr.Beam style video for withdrawing your reward fee properly in DLMM.
In conclusion, Meteora’s Dynamic Liquidity Market Maker (DLMM) revolutionizes liquidity provision on Solana by introducing a sophisticated system of zero-slippage price bins. Inspired by Trader Joe’s Liquidity Book, DLMM optimizes liquidity allocation for asset pairs, mitigating impermanent loss and enhancing LP profitability. With dynamic fee structures responsive to market volatility, DLMM empowers LPs with precise control over liquidity concentration, offering flexibility in deploying capital through various volatility strategies like Spot, Curve, Bid-Ask, and even single-sided positions. By providing LPs with the tools to tailor liquidity provision strategies to market conditions, DLMM fosters high capital efficiency, deeper liquidity, and increased fee earnings, positioning itself as the smartest choice for liquidity provision on Solana. Through innovative features like Dynamic Vaults and customizable token structures, DLMM facilitates organic liquidity expansion and offers project teams novel token launch options, further contributing to the growth and sustainability of decentralized finance ecosystems. As LPs and project teams embrace DLMM’s capabilities, it paves the way for a more vibrant and efficient decentralized financial landscape on Solana.
