Solana Ecosystem AMM Research: The Underlying Code Behind High Liquidity

In the current situation of the Web3 industry, DeFi-related products occupy an absolute market share. Among them, AMM (Automated Market Maker) is a key link and a powerful promoter of changes in Web3 finance. This article will introduce several important AMM implementations in the Solana ecosystem, hoping to provide some help to LP (Liquidity Provider) on how to choose their investment strategy.

CPMM

CPMM ( Constant Product Market Maker ) is the most basic AMM implementation and is implemented in many products. Here we use the AMM based on constant product launched by Raydium as an example. The constant product means that the supply of the two tokens in the pool has a fixed product: X * Y = k.

For liquidity providers, when anyone adds liquidity (adds assets) to the pool, CPMM will automatically create an associated account for the wallet address and issue LP Token (each token pair has its own LP Token Mint). This LP Token is used to prove that the wallet address holds a share of a pool, and the corresponding Token will be destroyed when the liquidity provider withdraws.

The on-chain program of CPMM is developed using Anchor, and the program code can be found at https://github.com/raydium-io/raydium-cp-swap . Let’s briefly confirm how it achieves constant product.

First, when users use Raydium's CPMM to exchange tokens, swap-related instructions will be triggered.

For example (for illustrative purposes only, this article is not responsible for any token): when a user wants to use USDC to exchange TRUMP, they can exchange it through the TRUMP-USDC pool.

For example, let's look at this transaction . For simplicity, let's ignore other instructions in the transaction and only look at the Raydium part. Find Raydium CPMM: swapBaseInput :

In Input Accounts, we can see that the input token is USDC and the output token is TRUMP. In the AMM of the Solana ecosystem, LP Pair can be simply represented by Token Account, without creating a new contract program and deploying it (such as the factory contract commonly used in Ethereum). When a transaction occurs, it interacts directly with Raydium's CPMM Program. The Solana program will modify the status of the corresponding Token Account through the incoming pool address, token address, etc. to perform swap operations.

For example, the code for the swapBaseInput instruction above can be found here . After a series of pre-checks, the exact amount of target tokens that can be exchanged is calculated in ConstantProductCurve.swap_base_input_without_fees :

The formula used is:

That is, after the total amount of TokenX and TokenY changes, their product should remain unchanged. The left side of the formula is the product after the change, and the right side is the product before the change.

After mathematical transformation, the above formula can be converted into the conversion formula of Δy (that is, the number of y tokens we can exchange):

That is, delta_y = (delta_x * y) / (x + delta_x) part in the code. Note that the calculation here does not include the handling fee, which has been deducted in the pre-logic of swap_base_input .

CLMM

CLMM (Concentrated Liquidity Market Maker) is also an AMM launched by Raydium. It is similar to Uniswap V3. Each token pair also has multiple fee tiers, and can create a corresponding pool for each tier.

Since the implementation of CLMM refers to Uniswap V3, when learning it, many concepts and implementation methods can refer to Uniswap's implementation. It also inherits Uniswap's concepts such as tick, multiple fee tiers, centralized liquidity, etc. More content can be found in the DEX development course launched by ZAN: DEX Development Practice - Uniswap Code Analysis - How Uniswap works - ZAN

However, it should be noted that, similar to CPMM, due to the characteristics of the Solana chain, Raydium CLMM does not need to deploy a separate contract for each pool, so there is no concept of factory contracts. This is different from Uniswap.

CLMM allows liquidity providers to select a price range when injecting funds, and the funds will be distributed only within the selected range:

For centralized liquidity pools, tokens exist on both sides of the current price. The price range selected in the above figure includes the current price, so the funds will be allocated to the two tokens in the pool.

We can also inject only one type of token to provide so-called one-sided liquidity (as shown below). This is somewhat similar to the limit order in the traditional financial model. LP funds will only be used when the token price reaches a certain range, but this model also has more risk points to consider.

Generally speaking, for pools with small price fluctuations, LPs tend to choose a smaller range; conversely, for pools with very drastic price fluctuations, they tend to choose a larger range. The purpose of this is to try not to let the current price deviate from the price range you choose, causing too much impermanent loss.

It should be noted that although centralized liquidity can make LP's capital utilization rate higher, it also places higher demands on LP's financial awareness. LP needs to manage its own liquidity more actively. If LP fails to respond effectively, the frequent fluctuations on the chain will easily cause LP to suffer serious impermanent losses.

DLMM

DLMM (Dynamic Liquidity Market Maker) is an AMM product launched by Meteora. It is also a type of Uniswap V3. It is very similar to the CLMM mentioned above. DLMM also allows LPs to concentrate their funds within a certain range near the current price. However, DLMM is somewhat different in its specific implementation and provides some special features.

DLMM provides the concept of Bin. The pool will start from the base price and exist as a Bin every small Bin step. If the transaction occurs in the same Bin, the trader will enjoy zero slippage. This can greatly increase the transaction volume and transaction success rate. In theory, LP can earn more transaction fees.

Similar to CLMM, the tokens in the pool are also distributed on both sides of the current price, and one token only needs to provide unilateral liquidity. However, according to the concept of Bin, the currently activated Bin (indicating the current exchange price) has two tokens. That is:

• Currently activated Bin: There are two tokens in it. Swapping tokens in the current Bin will be done at a fixed price with 0 slippage;
• Other Bins: Distributed on both sides of the currently activated Bin, each with only a single token.

When the amount of tokens in the currently activated Bin changes, if the tokens of one party are reduced to 0, DLMM will set the currently activated Bin to the next Bin on its left or right according to the actual situation in the pool, thereby driving price changes in the pool.

When LP provides liquidity, DLMM provides 3 strategies, namely Spot, Curve and Bid Ask

• Among them, Spot is the most universal, and basically all liquidity pools are suitable. It is considered to be the simplest liquidity strategy.
• Curve is more suitable for pools with very small price changes, such as stablecoin pairs. The price fluctuations in these pools are very small, and as its shape reveals, concentrating LP funds in this range can maximize the transaction fees.
• Bid Ask is more suitable for pools with very large price fluctuations. People tend to conduct more arbitrage transactions in such pools, and prices may be difficult to concentrate in a small range. This strategy usually requires LPs to frequently adjust their positions to prevent prices from deviating from the funding range they set. This is usually not easy because it involves market judgment.

Summarize

As an important part of the Web3 financial field, AMM promotes the popularization and development of decentralized finance through its unique mechanisms and innovations. With the continuous advancement of technology and the improvement of the ecosystem, AMM is expected to play a greater role in the future and further change the landscape of traditional finance.