Permissionless pools and farms on Raydium allow any project team or user to create a Market ID, bootstrap liquidity with mining emissions, and choose a custom trading fee tier for any token pair on Solana!
The road to permissionlessness
Raydium pioneered a permissionless AMM liquidity mining pool on Solana in 2021, allowing anyone to create an AMM pool.
Later, in July 2022, a permissionless ecological farm with a constant product pool was launched as the next step in decentralized liquidity, realizing permissioned mining rewards.
On October 1, 2022, Raydium launched the centralized liquidity (CLMM) pool, which increases the liquidity depth around the current price and provides traders with better prices. Liquidity providers (LPs) in the CLMM pool provide liquidity within a specific price range, increasing the fee ratio obtained for actively traded liquidity.
Permissionless CLMM pools and farms on Raydium now allow any user, project, or community to create a pool for any currency pair and control farming rewards to further bootstrap liquidity in the pool.
Driving liquidity across the ecosystem through capital efficiency
Liquidity providers in the CLMM pool are rewarded by earning transaction fees and token farming.
For sophisticated users and market makers, this means that capital can be deployed more efficiently to earn higher fees and reward shares, while also improving prices for traders. However, liquidity providers should be aware that actively monitoring positions and market volatility is critical to mitigating the potential for increased impermanent loss.
For projects and communities looking to drive token liquidity, permissionless CLMM pools and farms provide more control over incentivized liquidity.
Pool creators can currently choose from four fee tiers: 0.01% is best for very stable assets, 0.05% is best for pegged assets and high volume pairs, 0.25% is best for most pairs, and 1% is best for volatile assets. Choosing the right fee tier for your pool helps optimize LPs’ trading fee incentives.
Permissionless Farming and Bootstrapping Liquidity
Creators of permissionless CLMM pools can also control the release rewards to further incentivize and guide liquidity. Pool creators only need to create a farm, specify the number of tokens to be released as rewards, and then determine the start and end dates of mining. Then, as long as the user's CLMM liquidity position is within the trading range, mining rewards will be automatically obtained.
For projects considering creating a farm, there are several key issues to consider when determining token rewards.
Different TVL concepts: Generally speaking, the key metric for liquidity in a standard CPMM pool is the total value locked (TVL), but the concept of a CLMM pool is a bit different, focusing on liquidity around the mid-price of the token. Rather than nominally thinking about what value of rewards will attract how much TVL, creators of CLMM farms should consider how token emissions will affect 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 extent token emissions will increase the liquidity depth of a CLMM pool.
Calculating APR: It is important to understand that the APR calculation for standard AMM pools cannot be directly applied to CLMMs. For standard AMMs, rewards and fees are divided proportionally based on the liquidity provided in the entire pool, which is different from CLMM pools, where the yield of CLMM pools depends on the liquidity within the specific price point of the transaction. The APR calculation for CLMM is more complicated and can only be estimated. However, Raydium's user interface has three different estimated APR calculation methods so that CLMM liquidity and funding pool creators have a reference when considering yield.
Comparison between centralized money pools (CLMM) and constant product pools (CPMM)
Whether you are a user looking to earn yield or a project trying to bootstrap liquidity for your token, it is important to consider the differences between CLMM and CPMM pools.
CLMM pools are technically advanced and require users who provide liquidity to actively manage their positions to optimize returns. They are sometimes able to "do more with less" by concentrating liquidity near the middle price. Compared to constant product pools, traders can get better prices and lower price impact with lower liquidity. But CLMM pools are not without risk and may expose LP providers to greater impermanent losses than CPMM pools. LPs in CLMM pools are an active strategy.
Standard CPMM pools allow LP providers to earn income from transaction fees and mining rewards without actively managing positions. This is a more passive LP strategy. However, a large amount of liquidity in the pool is dispersed across the price curve, resulting in less efficient use of capital. Compared to CLMMs, CPMMs generally require more TVL to provide similar-priced Swaps.
What do I need to consider when creating a funding pool?
When deciding to create or provide liquidity to a CLMM or CPMM pool, the pool creator should determine what they hope to achieve with the pool and farm. They should also consider what types of users make up their community.
Do you want to incentivize liquidity management and provide traders with competitive prices with less liquidity? CLMM can be your potential choice.
Or maybe it’s more important to reward the early community and provide passive mining rewards while driving the TVL of the token? Then Raydium’s standard CPMM pool might be an option.
Likewise, pool creators may take price fluctuations and trading volume into account over time.
Next Steps for the Ecosystem
Raydium is excited to further drive decentralized liquidity across the Solana ecosystem through permissionless CLMM pools and farms.