DLMM vs. AMM: A Comparison of Decentralized Exchange Liquidity Mechanisms DLMM (Dynamic Liquidity Market Maker) and AMM (Automated Market Maker) are core mechanisms used in decentralized exchanges (DEXs) to provide liquidity. They differ significantly in design philosophy, functional characteristics, and technical implementation. This article provides a detailed comparison of their working principles, advantages, disadvantages, and technical implementations. 1. Core Types and Features of Traditional AMMs Traditional AMMs manage liquidity pools through smart contracts, replacing the traditional order book trading model. Based on their function design, AMMs can be categorized into the following main types: 1.1 Constant Product Market Maker (CPMM) Representative projects: Uniswap, Bancor Working principle: Based on the formula x * y = k, where x and y are the reserves of two tokens, and k is a constant. Token prices are determined by the ratio of tokens in the pool. When the supply of token X increases, the supply of token Y must decrease to keep k constant. Advantages: - Simple and efficient, allowing users to interact directly with the liquidity pool without needing an order book. - Supports trading of any token pair. Disadvantages: - Impermanent Loss (IL): Liquidity providers (LPs) may incur losses during price fluctuations. - Low capital efficiency, as liquidity is spread across the entire price range. 1.2 Constant Sum Market Maker (CSMM) Working principle: Fixed price, similar to traditional fixed-price orders. Disadvantages: - Traders and arbitrageurs may deplete the reserves of one token in the pool, causing liquidity imbalance. - Liquidity pools may concentrate on a single asset, losing normal trading functionality. 1.3 Constant Mean Market Maker (CMMM) Representative project: Balancer Working principle: Allows multiple token combinations with adjustable weights, but still based on a function similar to CPMM. Disadvantages: - Does not completely solve the impermanent loss problem. - Higher complexity, suitable for specific scenarios. 1.4 Hybrid CPMM (Stableswap) Representative projects: Working principle: Combines CPMM and CSMM to optimize stablecoin trading (e.g., USDT/DAI/USDC). Advantages: - Reduces slippage, suitable for assets with low price volatility. Disadvantages: - Limited to stablecoins or assets with highly correlated prices, not applicable to highly volatile tokens. 2. DLMM: A New Generation of Market Maker Mechanism DLMM (e.g., Meteora on Solana) is an evolved version of AMM that adopts a concentrated liquidity model. It improves capital efficiency by allocating liquidity to specific price ranges (called "bins" or price slots). Here are the core features and technical implementations of DLMM: 2.1 Working Principle Concentrated Liquidity: - LPs can choose to concentrate funds within a specific price range (e.g., 0.95-1.05 USDC/SOL) rather than across the entire price range. - Improves capital efficiency and reduces the waste of unused funds. Bins (Price Slots) Mechanism: - Each bin represents a fixed price range, and trades are executed at the bin's price, similar to limit orders. - Example: If the current bin price is 1 USDC/SOL, traders buy SOL with USDC at a fixed price until the SOL reserves in that bin are exhausted. - When a bin's liquidity is depleted, the system automatically switches to the next bin (e.g., price jumps to 1.01 USDC/SOL). Dynamic Fees: - Adjusts fees dynamically based on market volatility and trading volume to optimize LP returns. Single-Sided Liquidity: - LPs can provide liquidity with only one token (e.g., SOL), and smart contracts simulate traditional AMM token pairs through a "virtual pairing" mechanism. - Example: - Trader buys SOL with USDC: USDC enters the pool, and SOL is deducted from the bin's "virtual reserves." - Trader buys USDC with SOL: SOL enters the pool, and USDC is deducted from the bin's actual reserves. 2.2 Technical Implementation Smart Contract Management: - Tracks token reserves in each bin in real-time. - Updates bin reserves based on trade direction (buy/sell) and determines whether to switch to the next bin. - Triggers events when switching bins to notify the front-end or off-chain systems to update prices. On-Chain Order Book Experience: - The segmented price mechanism of bins provides users with an experience similar to centralized exchange order books. Dynamic Fee Calculation: - Smart contracts adjust trading fees in real-time based on market conditions, balancing LP returns and trader costs. 2.3 Advantages - Reduces Impermanent Loss: - LPs provide liquidity only for specific price ranges, so large price fluctuations affect only a portion of funds. - Zero Slippage Trading: - Trades within active bins are executed at fixed prices, resulting in minimal or zero slippage. - High Capital Efficiency: - Liquidity is concentrated in high-trading-volume price ranges, improving fund utilization. - Flexibility: - Supports single-sided liquidity, lowering the entry barrier for LPs. - Dynamic fee mechanisms optimize returns. 2.4 Disadvantages - Risk of Liquidity Depletion: - If trading volume is unbalanced (e.g., one-sided trading), a bin's liquidity may be depleted, causing trade suspension or price jumps. - Contract Logic Complexity: - Virtual token reserves rely on smart contract logic, requiring highly reliable contract design. - Technical Barrier: - Compared to traditional AMMs, DLMM implementation and usage demand higher technical expertise from developers and LPs. Conclusion Traditional AMMs (e.g., Uniswap, Balancer, Curve) achieve decentralized trading through simple mathematical functions (e.g., x*y=k), making them suitable for a wide range of token pairs but limited by impermanent loss and low capital efficiency. DLMMs (e.g., Meteora) significantly enhance capital efficiency and LP returns through concentrated liquidity, price ranges (bins), zero-slippage trading, and dynamic fee mechanisms, while effectively reducing impermanent loss. Single-sided liquidity and on-chain order book experiences further enhance their flexibility. Future Outlook: The complexity of DLMMs and their reliance on balanced trading volumes may limit their application in certain scenarios. However, their innovative design offers a more efficient liquidity solution for DEXs, especially in high-trading-volume markets. With the development of blockchain technology, DLMMs are expected to see broader adoption on more chains (e.g., Solana, Ethereum L2).