Solana: AMM vs CLMM Constant Product – A Detailed Comparison

The Solana ecosystem has been at the forefront of creating and improving decentralized finance (DeFi) platforms, and one of the most popular AMM (automated market maker) implementations on the network is Solana’s native token, SOL. Additionally, a new implementation called CLMM (Constant Maturity Mutual Matchmaker) has been gaining attention for its potential benefits in various DeFi applications. In this article, we’ll dive into the details of how AMMs and CLMMs work, focusing specifically on their use of constant product curves.

What is an AMM?

AMM, or Automated Market Maker, is a consensus algorithm that enables liquidity provision and market making through automated trading. It is designed to provide high liquidity, reduce slippage, and increase the overall efficiency of markets. A traditional AMM implementation uses a constant product curve for price discovery.

The Constant Product Curve:

In a constant product curve, the price of an asset is determined by its current price in proportion to some reference asset (e.g. tokens or fiat currencies). The formula is usually as follows:

Price = Current Price / Reference Price

For example, if you have 100 SOL and you want to determine the price of another token, your AMM would use a constant product curve with a reference asset of 1 SOL.

What is CLMM?

CLMM, on the other hand, uses a different approach to calculating asset prices. It introduces a concept called Constant Maturity Mutual Matchmaker (CMMM), which aims to reduce slippage and increase trading efficiency.

In CLMM, each tick is treated as an individual contract, allowing for more accurate price determination based on market conditions and the specific assets involved. The formula used in CLMM is similar to that of AMM, but with some key differences:

• Each tick is considered separately, rather than aggregated from multiple assets.

• Reference assets are usually identical or very similar to each other.

The CLMM formula can be represented as follows:

Price = (Current Price / Reference Price) ^ ((Asset 1 / Asset 2))

where Asset 1 and Asset 2 are the two assets involved in the trade, and « Reference Price » is a predetermined value that represents an ideal price for one of the assets.

Key Differences Between AMM and CLMM

Here is a summary of the key differences between AMM and CLMM:

• Tick-based Pricing: Both AMM and CLMM use constant product curves in ticks. However, in CLMM, each tick is considered separately, allowing for more accurate price determination.

• Reference Assets: In AMM, only one reference asset is used to determine the price of an asset. In contrast, CLMM uses multiple reference assets (either identical or very similar) for each individual contract traded.

Conclusion

AMM and CLMM are both popular implementations in the Solana ecosystem, but they serve different needs and use cases. AMM provides high liquidity and efficiency through its constant product curves, while CLMM aims to reduce slippage and increase trading efficiency by treating each tick separately.

When choosing between these two options, it is essential to consider factors such as market conditions, asset types, and your specific use case. If you prioritize efficiency and liquidity, an AMM implementation might be the better choice. However, if you need more accurate pricing for individual transactions or prefer a simpler approach, CLMM might be a better choice.

Recommendations

For general DeFi applications, we recommend starting with AMM implementations like Uniswap or SushiSwap on Solana.

If you are looking to implement a more specialized use case or require more precise pricing, CLMM might be a better option.