CLMM Overview
Introduction to CLMM
The Concentrated Liquidity Market Maker (CLMM) is an advanced evolution of the Automated Market Maker (AMM) model used in decentralized exchanges (DEXs). Unlike traditional AMMs, which distribute liquidity uniformly across all price levels, CLMM enables liquidity providers (LPs) to concentrate their capital within specific price ranges. This targeted approach enhances capital efficiency, reduces slippage for traders, and increases potential returns for LPs. Ferra’s CLMM implementation on the SUI network likely leverages these benefits to provide a robust liquidity solution for DeFi users.
Evolution from Traditional AMM
Traditional AMMs, such as Uniswap V2, rely on a constant product formula to manage liquidity pools. In these systems, liquidity is spread across the entire price spectrum (from zero to infinity), leading to capital inefficiency. Much of the provided liquidity remains unused, as trades typically occur within a narrow price range. CLMM, introduced by protocols like Uniswap V3 in May 2021, addresses this by allowing LPs to specify price ranges for their liquidity. This ensures that capital is utilized only where trading activity is most likely, significantly improving efficiency and reducing slippage.
Key Components of CLMM
CLMM operates with several core components that define its functionality:
Component
Description
Ticks
Discrete price points dividing the price range. Each tick represents a specific price, with tick spacing determining granularity (e.g., 0.01% price steps).
Liquidity Positions
LPs create positions by specifying a lower and upper tick. Liquidity is active only within this range, earning fees when trades occur inside it. Each position is an on‑chain NFT storing range, liquidity, and fees.
Fee Tiers
Pools offer different fee levels (e.g., 0.01%, 0.05%, 0.3%), allowing LPs to choose based on expected trading volume and risk.
Benefits of CLMM
CLMM offers significant advantages over traditional AMMs, particularly in the context of Ferra on the SUI network:
Higher Capital Efficiency: By concentrating liquidity in specific price ranges, LPs can earn higher fees with less capital compared to traditional AMMs.
Reduced Slippage: Traders benefit from deeper liquidity around the current price, resulting in lower price impact for trades.
Customizable Risk Management: LPs can select price ranges based on their market outlook, tailoring their exposure to volatility.
Increased Yield Potential: Concentrated liquidity positions in high-volume price ranges can generate higher fee returns.
SUI Network Synergies: SUI’s low transaction costs and high scalability enable frequent position adjustments and smooth operation during high trading volumes, enhancing CLMM’s effectiveness.
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