Analyzing DLMM: How to lead liquidity providers to earn more fees?

Author: Meteora

Compiled by: DeFi AdamZ

I talked a lot about Solana’s hardcore bottom layer, and I’ve been playing it recentlydefiAt the same time, let’s talk about something practical, how to make money~

At Meteora, we absolutely love Liquidity Providers (LPs)! Liquidity providers are huge contributors to the Solana ecosystem, helping to facilitate a seamless on-chain trading experience by increasing liquidity and reducing slippage.

We’ve been working hard to build products that solve liquidity providers’ pain points and support what we believe to be their main driver – earning more money on the internet with their capital.

We believe we have found the perfect tool to achieve this with the Dynamic Liquidity Market Maker (DLMM)!

DLMM: Key Features and Benefits

1. Zero slippage positions and precise liquidity concentration

• Improve capital efficiency and fees for liquidity providers

• Higher trading volumes and fees due to zero slippage within each position, significantly reducing price impact

2. Flexibly choose your preferred volatility strategy

• Provide liquidity providers with greater flexibility and control over efficient liquidity allocation

• Unlock more opportunities to earn higher fees based on market conditions and liquidity provider goals/risk profile

3. Dynamic fees that take advantage of volatility

• Fees increase or decrease depending on the level of market volatility, which in turn helps offset losses that liquidity providers may suffer in volatile markets and improves liquidity providers' profitability.

Since launching DLMM beta in December 2023, the protocol has generated nearly $1 billion in transaction volume from approximately $12 million in TVL, demonstrating its extreme capital efficiency and fee-earning potential.

Why LPs should care about DLMM

There are many reasons to become a liquidity provider, but we think most people would agree that earning fees is the top priority. Therefore, when building DLMM, our team focused on designing powerful features that makeLPs are able to earn as much fees as possible using their capital.

What's stopping liquidity providers from earning more fees?

Whenever a swap occurs, the liquidity provider earns a fee from the trader proportional to their share of the liquidity pool. Typically, the higher the trading volume of a pool, the more fees liquidity providers earn.

However, the liquidity deposited in automated market makers (AMMs) and liquidity protocols is often not effectively utilized because it is distributed across all prices from 0 to infinity, resulting in a large amount of idle funds that are unavailable at the current price and also Unable to capture charges. Additionally, most liquidity pools have fixed fee tiers, which can result in opportunity costs for liquidity providers whenever trading demand is high, as traders are more willing to pay higher fees during this period.

Most liquidity is not used effectively

For all liquidity providers, a smarter way to provide liquidity is needed!

DLMM aims to solve current existing problems and provide a powerful charging machine for LPs on Solana.

1. Get higher fees with precise liquidity concentration and zero slippage price ranges

Similar to how centralized liquidity market makers (CLMMs) operate, DLMMs work by allowing liquidity providers to specify price ranges andTokenConcentrated around current market prices, supporting high-volume trading with relatively low capital. But DLMM greatly improves on what CLMM offers by introducing a zero-slip price range.

Unlike CLMM (which has slippage), the liquidity of asset pairs in DLMM is organized into discrete price bins, and reserves deposited in bins can be exchanged at the price defined for that specific bin.

Therefore, transactions in active positions haveZero slippage or price impact,Therefore LPs can expect to gain more trading volume through DLMM.

How price boxes work

• Active price positions include bothToken X 和 Y 储备的仓。活跃仓左侧的所有仓仅包含Token Y，而其右侧的所有仓仅包含代币 X。只能有在任何时间点都有一个活跃的垃圾箱，该垃圾箱可以赚取交易费用。

• The liquidity in each warehouse can be exchanged at a fixed price; ensuring zero-slip exchange within the box.

• Transactions add X tokens and take out Y tokens (or vice versa) until there is only 1 type of token left in the bin and the active bin moves left or right.

• All containers except the active container contain only one type of token (X or Y) because one of the tokens in the container is exhausted or waiting to be used.

• The market for token asset pairs is built by aggregating all discrete liquidity positions.

What does this mean for liquidity provider fees?

This could mean charging more fees for the same or fewer coins, especially for more stable pairs that are less volatile.

Liquidity providers are able to view all available price positions at which currently active positions are located before selecting the precise price point at which they want to provide liquidity and the depth of liquidity. Combined with zero-slippage positions, this makes it easier for liquidity providers to further focus their liquidity to achieve greater capital efficiency and obtain higher trading volumes and fees than CLMM.

This is especially useful for more stable token pairs where trading occurs within a narrow range. For example, USDC/USDT transactions typically occur within the range of $0.99 to $1.01, so liquidity outside of this range is generally not affected and liquidity providers do not earn fees. As an LP, you can precisely concentrate most of your liquidity within $1 active positions, which will optimize your volume capture and therefore the trading fees you earn.

In the future, DLMM can integrate our dynamic treasury so that liquidity providers can earn loan proceeds on capital in unused treasury boxes, further improving capital efficiency.

2. More opportunities for higher fees through different volatility strategies

Another reason why we believe (in our bias) that DLMM is the smartest way to provide liquidity on Solana is that LPs have the flexibility to choose their volatility strategies. For more active liquidity providers, this flexibility gives them greater control when optimizing for higher yields.

Liquidity providers can choose the precise price points at which they want to provide liquidity and the number of tokens allocated at different price points to build the ideal liquidity model that best suits their strategy - essentially determining the different prices at which they want liquidity The depth or concentration of points. price point.

What does this mean for liquidity provider fees?

For liquidity providers who fully understand the market and deploy the right strategies to complement their assets against volatility, they are able to achieve extremely high capital efficiency and earn higher fees.

As a liquidity provider, which volatility strategy should you use?

1. In stock

Spot provides a uniform allocation of liquidity that is flexible and adaptable to any type of market and conditions. This is the relatively most straightforward strategy for new liquidity providers who don’t want to rebalance positions every day. This is similar to setting a CLMM price range.

Example:If you believe that the SOL price will fluctuate steadily between $82 and $85 over the next 5 days, you can add liquidity to the SOL/USDC pool using a spot strategy and set the range (with some buffering) to 81.90 to 85.86 USDC Follow SOL. At 60 positions, this gives you wider coverage to earn consistent fees, and you may only need to rebalance your positions every 5 days.

2. Curve

Ideal for a focused approach that aims to maximize capital efficiency by allocating capital primarily in the middle of the price range. This is useful for stables or pairings where prices don't change often.

Example:you thinkcryptocurrencyWill drop over the next 2 weeks and want to hold stablecoins, so you add liquidity to the USDC/USDT pool to earn fees in the process. Since this pool has very little volatility, you can consider a curve strategy. You could specify a very narrow range (e.g. 35 bins) of 0.999500 to 1.002904 USDT per USDC because you expect the price to be very close to the middle; the current price is 1.001301 USDT per USDC. As the price moves away from the middle, the liquidity deployed by each position decreases (the position size becomes smaller).

3. Buy and sell

The bid and ask price has an inverse curve distribution, with most of your capital allocated to either end of the range. This strategy can be used to capture greater volatility away from current prices. Buying and selling is more complex than spot and may require more frequent rebalancing to be effective, but the potential for charging fees is great if prices fluctuate significantly around the current price. Bid-Ask can also be deployed unilaterally for DCA inbound and outbound strategies.

Example:If you are equally bullish on BONK and SOL, don't mind holding BONK or SOL over time, and believe that BONK/SOL prices tend to fluctuate significantly within a given range during this period, you may consider the Bid-Ask strategy. In this example, the majority of your funds are deployed to either end of the range at the lowest prices of 0.0000000880620387 and 0.000000173238 SOL per BONK. As the BONK price moves away from the middle, more liquidity is used and you will buy or sell BONK or SOL at an increasing rate (depending on the price direction). You should be prepared to rebalance more frequently, perhaps every 2-3 days.

3. Dynamic fees that take advantage of volatility

As a liquidity provider, one of the risks you face is Impermanent Loss (IL). IL occurs when the value of an LP's initial token deposit in the pool becomes less compared to holding the tokens alone without depositing them into the pool.

Consider a scenario where your LP enters the A/B pool and the value of Token A increases relative to Token B; you will end up with more Token B and less A. If you end up in the poolXiaobai NavigationThe total value of the A and B token amounts is now less than if you were just holding the original token (providing no liquidity), then you would have IL. This loss is "impermanent" in that it is only fully realized when you withdraw the liquidity. This situation would be exacerbated by increased market volatility as IL increases with price differentials.

To combat IL, DLMM has developed dynamic fees designed to capture more value from market fluctuations. In times of higher market volatility, fees are increased to provide liquidity providers with more returns for a given trading volume; in times of lower market volatility, fees are reduced to encourage fee-generating trading volume.

Dynamic fees have two components – base fees and variable fees.

• Basic fee:The market's base fee is configured by the pool creator and is determined by the bin step (the basis point difference between 2 consecutive bins) and the base coefficient – this is the base fee added to the bin step to allow for adjusted amplification.

• Variable fees:Variable fees depend on market volatility, which is affected by the frequency of swaps and swaps across multiple positions. Fees are calculated and allocated per bin, allowing fees to be fairly distributed to LPs in each cross-bin.

What does this mean for liquidity provider fees?

Dynamic fees help mitigate the impact of IL by increasing or decreasing fees based on market fluctuations, thereby increasing the likelihood of LP profitability. This is especially useful for trading pairs with higher volatility (as higher volatility results in higher IL), where overcoming the IL is always a challenge, especially without farming rewards.

It’s time to stack fees and points on DLMM!

We hope this article provides useful guidance for taking your first steps as a DLMM LP. You can also view our DLMM documentation here.

For a more visual guide, watch the video tutorial below:

• For new LP:Link

• DLMM walkthrough:Link

• Customize DLMM price range and liquidity distribution:Link

With the 10% LP stimulus package coming soon, now is the perfect time to check out DLMM and benefit from its precise liquidity concentration, volatility strategies, and dynamic fees. Learning how to provide liquidity will give you a decisive advantage once the points system officially launches on January 31st and the JUP token is launched (also using DLMM!).

In addition, inDecember 1 to January 31During the DLMM Beta period, we will provide Beta tester reward packages to LP contributors. This bonus package will be determined at the end of our points system. Once we achieve our target milestones, all points earned will be converted into MET token drops following the MET liquidity event.

Going forward, LPs can look forward to more opportunities to earn rewards, such as Kamino Finance integrating Meteora’s DLMM into their vault and launching their own points system. This means that as a DLMM LP you can overlay points from multiple sources.

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