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Concentrate Liquidity (CLMM)
Concentrated Liquidity (CLMM) is a newer approach to automated market making (AMM) that is gaining popularity in the decentralized finance (DeFi) space. Unlike traditional AMMs that evenly distribute liquidity across a wide range of prices, CLMMs allow liquidity providers to concentrate their liquidity around a specific price range. This can result in lower slippage and better capital efficiency, as more liquidity is available where it is needed most. Several decentralized exchanges (DEXs) and other DeFi protocols have already integrated CLMM into their platforms, and in the future, SeaSwap plans to do the same. The integration of CLMM can offer several benefits, such as improving capital efficiency, reducing slippage, and increasing liquidity for specific price ranges. This can potentially attract more liquidity providers and traders to Seawap, leading to higher trading volumes and revenue.
The formula (x+L/√Pb)(y+L√Pa)=L^2 is used to calculate the liquidity provided by a position in a Concentrated Liquidity Market Maker (CLMM). Specifically, the formula relates the reserve amounts of two assets (x and y) in a liquidity pool to a constant L, which is proportional to the total liquidity provided by the position. Pa and Pb represent the price ranges for asset A and asset B, respectively, and the position holds reserves for both assets. The price movement of each asset is bounded by its price range, and as the price of one asset moves towards its upper bound, the reserve of that asset is depleted. Therefore, a position only needs to hold enough of asset X to cover price movement to its upper bound, and enough of asset Y to cover price movement to its lower bound. When the price exits a position's range, the position's liquidity is no longer active, and it no longer earns fees. At this point, the liquidity is composed entirely of a single asset because the reserves of the other asset must have been entirely depleted. If the price re-enters the range, the liquidity becomes active again.
The amount of liquidity provided by a position can be measured by the value of L, which is equal to the square root of k. The real reserves of a position are described by the curve. The formula (x+L/√Pb)(y+L√Pa)=L^2 is used to determine the reserve amounts required for a position to provide a specified amount of liquidity, given the price ranges for each asset in the liquidity pool.