What is Liquidity?
A liquidity is how easy an asset can be bought or sold in the cryptocurrency space. It is the ease in which tokens can be swapped on a De centralized Exchange. The more the liquidity, the easier and faster tokens can be swapped on a DEX. You can be a Liquidity Provider and earn some passive income.
Who is a Liquidity Provider?
Basically, a liquidity provider is one who adds liquidity to a liquidity pool. Liquidity Providers are DEX users who fund a liquidity pool with tokens they own to earn profits passively from their deposit. They also earn fees from the transactions on the DEX they provide liquidity on. Usually, the transaction fees are distributed proportionally amongst all the liquidity providers.
What is the Algorithm of popular DEXes?
The most common algorithm adopted by current Dex platforms is AMM, the Automated Market Maker. The AMM follows the classic constant product equation
x∗y=kx*y=kx∗y=k
Assets are distributed evenly over the entire price curve. In the equation, k is a constant value while x and y are the liquidity of two corresponding tokens of the trading pool. All the liquidity added by liquidity providers in Automated Market Maker are throughout the entire range of (0, ∞). It is simple but it also leads to a deep-rooted problem for AMM platforms, in which most liquidity in AMM is idle in the long term. A huge amount of assets in AMM only delivers a price that is still volatile.
Most traders only utilize the liquidity around the current market price and most liquidity providers’ fee revenue is also generated within the near-market-price range. This means that for most users, they only need a smaller price range but flexible range settings, instead of always having the full price range.
Why Crema?
Crema Finance offers a better opportunity for Liquidity providers. This is with an innovate system, Concentrated Liquidity Market Maker (CLMM) n Crema’s CLMM pools, a user’s position only needs to contain enough assets X and Y to cover the price movement between the maximum and minimum of this position’s price range. When the price moves out of the price range of a position, this user position will turn into an inactive status. At that time, there will be only one type of asset left in that position. The other asset should have run out and all been exchanged to its paired token. Which asset is left depends on which side the price exits the range from. An inactive position will stop earning fees from users’ transactions. At the same time, those positions in ranges that contain the newest trading price will start working. As the price moves up and down, positions in different ranges work alternately. Aggregated and connected with each other, these positions of different ranges jointly achieve the similar trading goals as what AMM does, but CLMM executes this with much higher market depth in each range. Besides, liquidity providers are naturally encouraged to add most of their liquidity centered around the current market price in order to earn more transaction fees. Therefore, the liquidity in CLMM will usually exist in a different distribution form.
The concentrated liquidity market maker gives much more flexibility to liquidity providers. LPs can open as many positions as they desire to meet their different needs. They can choose to inject their liquidity within a narrow range to control their liquidity cost to a relatively low level. In addition, they can conduct further actions on their positions according to the market change to maintain the active status of their positions to earn more fees.
If you’re intrigued about providing liquidity in Solana DEXes, Why not Crema Finance?
