Concentrated Liquidity Mining
Orca + Raydium [CLMM]
Overview
Unlike standard pools, liquidity providers on Orca and Raydium will compete for trading fees and token emissions, which are divided among liquidity providers according to the parameters of their deposits. Due to the structure of Concentrated Liquidity and Leverage, users who set a tighter price range, around the current token price will receive a higher share of fees and incentives. They are, on the other hand, more vulnerable to Divergence Loss (also known as Impermanent Loss or IL).
Adding/Removing Concentrated Liquidity
When an LP adds liquidity to the AMM, we increase the amount of liquidity on the AMM curve by increasing k in the constant product curve.
Specifically, sqrt_k is incremented by the number of lp_shares the LP takes on (code) and so the proportion of liquidity provided to the vAMM is the ratio: lp_shares / sqrt_k.
This ratio is used throughout the code to calculate the amount of base/quote asset amounts to give to LPs.
This is done automatically and funds and price ranges are calibrated on a daily basis by Coin Capital®
What is a CLMM?
Concentrated Liquidity Market Maker (CLMM) pools allow liquidity providers to select a specific price range at which liquidity is active for trades within a pool. This is in contrast to constant product Automated Market Maker (AMM) pools, where all liquidity is spread out on a price curve from 0 to ∞. For LPs, CLMM design enables capital to be deployed with higher efficiency and earn increased yield from trading fees. For traders, CLMMs improve liquidity depth around the current price which translates to better prices and lower price impact on swaps.
While CLMMs come with the benefits of higher capital efficiency, impermanent loss is magnified by the design, so a full understanding the implications of impermanent loss and concentrated liquidity is critical!
The design for CLMMs means capital can be more efficiently allocated towards market making within a price range. However, users should be aware that actively monitoring positions and market fluctuations is critical to mitigating the potential for increased impermanent loss.
How do liquidity price ranges work?
In CLMM pools, users are able to select a specific price range in which to provide liquidity. LPs earn fees in proportion to their share of the liquidity at the current price. As such, LPs have a strong incentive to actively manage positions to ensure the current price of a pool is actively trading within their selected price range.
If price moves out of the selected price range, a position will no longer actively trade or earn fees and the LP may experience significant impermanent loss. In a standard AMM pool, if the price of a base token rises it means that users are trading the quote token for the base token. As such, the pool and LPs now have more of the quote token and less of the base token.
CLMMs work in the same manner, however this is accelerated within the selected price range. For example, if the price trades below the position's min price, the position will then be comprised of 100% base token. If price trades above the max price, the position will effectively sell the base token and then be 100% comprised of the quote token.
APR Calculations for CLMM pools
In a CLMM pool, when price trades within an individual tick, fees are distributed proportionally to the liquidity provided by in-range positions. An accurate APR can be found for an individual tick based on trading volume within a time period, however, extrapolating this to all of the ticks in the pool and among multiple LPs is extremely complex. Traditional constant product pool APR calculations can not be directly applied to CLMM pools. Projected returns for CLMMs should be considered as an estimate at best.
There are three methods for estimating APRs for CLMM pools, each with its own calculation:
Overall Pool Estimated APR
Estimated APR for a user position
Delta Method
Multiplier Method
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