METEORA’s DLMM (Dynamic Liquidity Market Maker): WHY AND HOW TO USE
In the world of trading, one thing remains King; Liquidity. Liquidity sits beautifully as the anchor of so many things on a network or protocol.
Among those things are: Efficiency for the users and Accessibility to a large pool of investors.
Solana among other protocols has built an ecosystem that allows liquidity and systems built on the Solana network work seamlessly together. With its speed, low fees and scalability, the Solana network is fast becoming the most preferred network by users, but even with all of these great features, an issue still poses a threat to the ecosystem’s growth and user adoption and that is lack of adequate liquidity. Though the threat exists,solutions like Liquidity providing have risen to the occasion.
Liquidity Providing simply means providing assets to a liquidity pool and they are a key factor of DeFi Platforms, especially decentralized exchanges. Liquidity Providers are essential in the DeFi ecosystem as they enhance the efficiency of trading and borrowing, which in turn, strengthens the market’s liquidity and Stability.
Meteora believes that Liquidity Providers are one of the key backbones of the Solana ecosystem as they help to facilitate a seamless on-chain trading experience by improving liquidity and reducing slippage.
While there have been Liquidity Pools in the past, the traditional Liquidity Pools have Limited Liquidity. Liquidity pools provide deep liquidity for traders, but compared to Centralized exchanges, they are limited. This makes it quite difficult in executing large trades or trades for less popular tokens.
Also, while liquidity pools help to reduce slippage when a large percentage of the initial token amount in the pool is swapped, slippage can still occur if the depth of the pool is not sufficient to handle a large trade, hence the need for a Deep Liquidity Pool.
A solution was designed for traders to help define their trading experiences and that is Concentrated Liquidity Market Makers (CLMMs).
“A Concentrated Liquidity Market Maker (CLMM) is a liquidity model that allows Liquidity Providers allocate their tokens within a selected price range where they will be actively utilized.”
Unlike traditional Automated Market Makers(AMMs) that distribute liquidity evenly across an unending range, CLMMs ensure the pooled funds are utilized more efficiently within the exchange. With CLMMs, users can choose to focus their capital along a specific price range for their tokens.
While this offers a kind of solution, it’s still limited, as using CLMMS can result in potential losses while trading highly volatile tokens. Also, managing CLMM positions can be chaotic as it’s time-intensive, needs manual management as well as frequent rebalancing.
In all of these, a more profitable and perfect way is needed and that’s where Meteora comes in. Meteora takes trading a step further by building products that address LP pain points and enables Liquidity Providers earn more money with their capital and to achieve this, Meteora introduces its own Dynamic Liquidity Market Maker (DLMM)!
Meteora’s DLMM is a new form of concentrated liquidity AMM on Solana that gives LPs access to precise liquidity concentration and dynamic fees that improves profitability for providing liquidity, and also dynamic fees during market volatility and other forms of rewards where applicable.
Meteora’s DLMM is based on Trader Joe’s Liquidity Book — A novel, highly-capital efficient Automated Market Maker (AMM) protocol that facilitates Zero Slippage, Surge Pricing for LPs during high market volatility, High Capital Efficiency as well as Flexible Liquidity.
Meteora Implements this by organizing the liquidity of an asset pair into discrete price bins.
Reserves deposited in a liquidity bin are available for exchange at the price specified for that bin. Slippage does not apply to swaps that occur within the price bin. The market for the asset pair is created by combining all of the individual liquidity bins.
Why should you use METEORA’s DLMM
The Key features and benefits of Meteora’s DLMM includes:
- High Capital Efficiency:
With Meteora’s DLMM, LPs can concentrate their liquidity beyond the price range of a token by creating liquidity shapes that can fit their liquidity to the price movement, utilizing their capital better.
This is possible because with DLMM, High volume trading can be supported with low liquidity requirements through concentration of tokens at or around the current market value.
- Zero Slippage:
Users can easily swap tokens within an active bin with Zero slippage or Price impact.
This way, LPs can easily concentrate their liquidity to capture more volume and fees compared to other platforms.
Dynamic Fees:
The volatility of the market often influences the Swap fees and this in turn leads to loss on the LPs. With Meteroa’s DLMM, LPs earn dynamic swap fees during high market volatility to compensate for impermanent loss and also enhance LP profitability.
Flexibile Liquidity
With Meteora’s DLMM, LPs have a better flexibility with Liquidity distributions according to their strategies. With this feature, LPs could get higher fees by concentrating their liquidity to a narrow price range around the current market price to minimize slippage, or they could spread their liquidity across a broader price range to minimize the effects of impermanent loss.
References
https://www.cronj.com/blog/liquidity-pool-benefits-types-risks-and-limitations/#Limited_liquidity
https://coinmarketcap.com/community/articles/65608f0cc54ab771279066a5/
