Analysis of the AMM Mechanism in the Solana Ecosystem

In the current Web3 industry landscape, products related to decentralized finance dominate the market. Among them, the automated market maker (AMM) serves as a key link and is an important force driving financial innovation in Web3. This article will introduce several important AMM implementations in the Solana ecosystem, aiming to provide references for liquidity providers in selecting investment strategies.

Constant Product Market Maker ( CPMM )

Constant product market makers are one of the most basic implementations of AMM. Taking an AMM based on constant product launched by a certain DEX as an example, its core principle is to maintain a fixed product of the supply of two tokens in the pool: X * Y = k.

When users add liquidity to the pool, the system automatically creates an associated account for the user's wallet and issues LP tokens. These LP tokens are used to prove the user's share proportion in a specific pool and are destroyed when liquidity is withdrawn.

The on-chain program of CPMM is developed using Anchor. During the token exchange process, the system will trigger swap-related instructions. Taking the exchange of USDC and TRUMP tokens as an example, users can operate through the TRUMP-USDC pool. During the transaction, the program will modify the status of the corresponding Token Account based on the provided pool address, token address, and other information to complete the swap operation.

The specific amount of target tokens that can be exchanged is calculated using the constant product formula. Factors such as transaction fees will be taken into account during the calculation.

Concentrated Liquidity Market Maker ( CLMM )

Concentrated Liquidity Market Makers are similar to the V3 version of a well-known DEX, where each token pair can have multiple fee tiers and corresponding pools created for those tiers. CLMM inherits concepts such as multi-rate tiers and concentrated liquidity.

Unlike CPMM, CLMM allows liquidity providers to select a price range when injecting funds, and the funds are distributed only within the selected range. This mechanism enables LPs to manage their capital allocation more flexibly.

LP can choose to provide unilateral liquidity, similar to limit orders in traditional finance. For pools with low volatility, LPs tend to choose a smaller price range; whereas for pools with significant volatility, they tend to opt for a larger range.

Concentrated liquidity can improve capital efficiency, but it also places higher demands on LP's financial management capabilities. LPs need to manage their liquidity more actively to cope with the potential risks brought about by market fluctuations.

Dynamic Liquidity Market Maker(DLMM)

Dynamic Liquidity Market Maker is another AMM product based on centralized liquidity. DLMM introduces the concept of "Bin", dividing the pool from the base price into different bins at certain intervals of (Bin step).

In DLMM, if a trade occurs within the same Bin, traders will enjoy zero slippage. This feature helps to increase trading volume and success rates, theoretically allowing LPs to earn more trading fee income.

DLMM provides three liquidity strategies: Spot, Curve, and Bid Ask. The Spot strategy is suitable for most liquidity pools; the Curve strategy is more appropriate for pools with small price fluctuations, such as stablecoin pairs; the Bid Ask strategy is suitable for pools with larger price fluctuations, but it requires LPs to frequently adjust their positions.

Summary

The Automated Market Maker (AMM) mechanism, as an important component of the Web3 financial sector, promotes the development of decentralized finance through its unique operation method. With continuous technological advancements and an increasingly完善 ecosystem, AMMs are expected to play a greater role in the future, further transforming the traditional financial landscape.