Introducing Permissionless Concentrated Pools & Farms
Permissionless concentrated pools and farms on Raydium allow any project team or user to create a market, bootstrap liquidity with farming emissions, and select a custom fee tier for any token pair on Solana!
The Path to Permissionless
Raydium pioneered permissionless pools on Solana in May 2021 as the first AMM to allow users to create a constant product AMM pool for any token pair. Permissionless Ecosystem Farms for constant product pools then launched in July 2022 as the next step in decentralized liquidity, enabling permissionless farming rewards.
On October 1, 2022, Raydium launched Concentrated Liquidity (CLMM) pools, which improve liquidity depth around the current price and translate to better prices for traders. Liquidity providers (LPs) in CLMM pools provide liquidity within a specific price range, increasing the proportion of fees earned on actively traded liquidity.
Permissionless CLMM pools and farms on Raydium now allow any user, project, or community to create a pool for any pair, as well as have control over farming rewards to further bootstrap liquidity in the pool.
Driving Ecosystem-wide Liquidity through Capital Efficiency
Liquidity providers in CLMM pools are incentivized by earning yield in the form of trading fees and token farm emissions.
For sophisticated users and market makers, this means capital can be deployed more efficiently to earn a higher share of fees and rewards, while also improving prices for traders. However, liquidity providers should be aware that actively monitoring positions and market fluctuations is critical to mitigating the potential for increased impermanent loss.
For projects and communities looking to drive liquidity for a token, permissionless CLMM pools and farms enable even more control over incentivizing liquidity.
Pool creators can currently choose between four fee tiers: 0.01% best for very stable assets, 0.05% best for pegged assets and high-volume pairs, 0.25% best for most pairs, and 1% best for exotic or volatile assets. Choosing the right fee tier for a pool helps to optimize trading fee incentives for LPs.
Permissionless Farms and Bootstrapping Liquidity
Creators of permissionless CLMM pools also have the ability to control farming rewards to further incentivize and bootstrap liquidity. Pool creators simply need to create a farm, specify an amount of tokens to emit as rewards, and then determine the start and end date of the farming period. Users will then automatically earn farming rewards as long as their CLMM liquidity position is within range for trading.
For projects considering creating a farm, there are a couple key things to consider when determining token incentives.
- A different concept of TVL: In general, the key metric for liquidity in standard CPMM pools is Total Value Locked (TVL), however the concept is a bit different for a CLMM pool where the focus is liquidity around the mid-price of the token. Instead of thinking in notional terms about what value of rewards will attract what amount of TVL, CLMM farm creators should consider how token emissions will influence liquidity around the mid-price. Changing your definition of TVL from ‘total liquidity in the pool’ to ‘total liquidity around the current price’ will help projects determine to what degree token emissions will increase liquidity depth in a CLMM pool.
- Calculating APR: It’s important to understand that APR calculations for standard AMM pools cannot be applied directly to CLMMs. For standard AMMs, rewards and fees are divided proportionally based on liquidity provided in the entire pool, this contrasts with CLMM pools where yield depends on the liquidity within the specific price ticks that are traded. CLMM APR calculations are more complex and should be used for estimations only. However, Raydium’s UI features three different estimated APR calculations to give CLMM LPs and pool creators a reference when considering yield.
Concentrated Pools (CLMM) vs Constant Product Pools (CPMM)
Whether you’re a user looking to earn yield, or a project trying to bootstrap liquidity for your token, it’s important to consider the differences between CLMM and CPMM pools.
CLMM pools are technically advanced and require LPs to actively manage their positions in order to optimize yield. Savvy LPs are sometimes able to “accomplish more with less” by concentrating liquidity around the mid-price. Traders can get better prices and lower price impact on swaps with less liquidity compared to constant product pools. But CLMM pools are not without risk and may expose LPs to greater impermanent loss than CPMM pools. LPing in a CLMM pool can be thought of as an active strategy.
Standard CPMM pools allow LPs to earn yield from trading fees and farming rewards without the need to actively manage a position. This is a much more passive LP strategy. However a significant amount of liquidity in the pool is spread out along the entire price curve leading to a less efficient use of capital. CPMMs often need more TVL to offer similarly priced swaps when compared to CLMMs.
What to consider when creating a pool?
When deciding to create or provide liquidity in a CLMM or CPMM pool, a pool creator should determine what they wish to achieve with the pool and farm. They should also consider what type of users make up their community.
- Do you want to encourage active liquidity management and offer traders competitive prices with less liquidity? Potentially a CLMM is the choice here.
- Or maybe rewarding early community and offering passive farming rewards while driving TVL for the token is more important? Raydium’s standard CPMM pools might then be an option.
- Likewise, pool creators might consider price volatility and trading volume over time.
The next step for ecosystem-wide liqudity
Raydium is super excited to further drive decentralized liquidity throughout the Solana ecosystem with permissionless CLMM pools and farms. If you want to learn more about creating a CLMM or CPMM pool and farm, make sure to check out the info below!
To learn about creating a permissionless concentrated pool and farm, click here.
To learn about creating a farm for a constant product pool, click here.
If you have any questions, feedback or need support, make sure to drop by the Raydium Discord server!