Web3 Financial Innovation: An In-depth Analysis of Mainstream AMM Mechanisms in the Solana Ecosystem

In the current landscape of the Web3 industry, DeFi-related products account for a significant portion of the market share. Among them, Automated Market Makers (AMMs) play a key role in driving the transformation of the Web3 financial sector. This article will focus on several important AMM implementations within the Solana ecosystem, aiming to provide references for investment strategy choices for liquidity providers (LPs).

CPMM: Constant Product Market Model

CPMM (Constant Product Market Maker) is one of the most basic implementations of AMM. Taking a trading platform on Solana as an example, its CPMM follows the principle of constant product of the supply of two tokens in the pool: X * Y = k.

When users inject liquidity into the pool, the system will automatically create an associated account for the user's wallet and issue LP Tokens to prove the user's share ratio in a specific pool. These LP Tokens will be destroyed when the user withdraws liquidity.

The on-chain program of CPMM is developed using Anchor. During the token exchange process, user actions will trigger swap-related instructions. For example, when a user exchanges USDC for TRUMP, the system will call the TRUMP-USDC pool to perform the swap.

The specific exchange calculation formula is:

delta_y = (delta_x * y) / (x + delta_x)

Among them, delta_y represents the number of target tokens that the user can obtain, and this calculation does not include transaction fees, as the fees have already been deducted in the previous logic.

CLMM: Concentrated Liquidity Market Model

CLMM (Concentrated Liquidity Market Model) draws on the ideas of a well-known DEX, allowing for multiple fee tiers to be set for each token pair and creating corresponding liquidity pools.

One of the main features of CLMM is that it allows LPs to choose a specific price range when providing liquidity, with funds distributed only within that range. This mechanism enables LPs to more precisely control fund allocation and improve capital utilization efficiency.

LP can also choose to inject only a single type of token, providing what is known as "one-sided liquidity." This is similar to limit orders in traditional finance, but requires more careful risk management.

Typically, for pools with smaller fluctuations, LPs tend to choose a narrower price range; whereas for pools with severe fluctuations, they will choose a wider range. This is done to reduce the risk of impermanent loss.

Although concentrated liquidity improves capital utilization, it also raises higher requirements for LP's financial knowledge and management skills. If not handled properly, it may result in significant losses due to market fluctuations.

DLMM: Dynamic Liquidity Market Model

DLMM (Dynamic Liquidity Market Model) is another implementation of AMM based on centralized liquidity. It introduces the concept of "Bin" which subdivides the price range into multiple small segments.

In DLMM, if a transaction occurs within the same Bin, users can enjoy zero slippage trading, which helps increase trading volume and success rates, theoretically bringing more profits to LP.

The liquidity distribution of DLMM is as follows:

• Current active bin: Contains two tokens, trading is done at a fixed price with no slippage.
• Other Bins: Distributed on both sides of the activated Bin, each containing only a single token.

When the activation of a certain token in the Bin is exhausted, the system will automatically activate the adjacent Bin, thereby driving the price change in the pool.

DLMM provides LPs with three strategies:

1. Spot strategy: Suitable for most liquidity pools, it is the most basic strategy.
2. Curve Strategy: Suitable for pools with low price volatility, such as stablecoin pairs.
3. Bid Ask Strategy: Suitable for pools with significant price volatility, requiring LPs to frequently adjust their positions.

Conclusion

AMMs, as a core component of Web3 finance, drive the development of decentralized finance through their unique mechanisms. With technological advancements and the improvement of ecosystems, AMMs are expected to play a greater role in the future, further reshaping the financial landscape. For participants, deeply understanding the advantages and disadvantages of various AMM mechanisms and choosing strategies that suit them will be key to success in this rapidly evolving field.