Concentrated Liquidity: Top CLMM Protocols + Pontem Survey Insights
Table of Contents
As Pontem prepares for the release of concentrated liquidity pools on Liquidswap, here is a brief guide to the major players in the space: Uniswap V3, Trader Joe Liquidity Book, PancakeSwap, SushiSwap, and others. We’ve also included the results from our survey of concentrated liquidity providers, where we asked about the advantages and disadvantages of CLMMs.
A refresher: what is concentrated liquidity?
Concentrated liquidity is a way to deploy liquidity in a DEX pool in a limited range (usually around the current price) as opposed to uniformly along the whole price curve. You choose the range when you open a position. If you’re not familiar with concentrated liquidity, read our explainer first.
This increases capital efficiency, as the funds are constantly used for swaps and generate more fees. In a traditional pool, some of your funds will be sitting idle most of the time; in a concentrated liquidity pool, all of your money keeps working.
Concentrated liquidity pools can generate up to 320% higher APR than regular pools, but they also have potential limitations:
1) Concentrated liquidity is technically complex and not suited for beginners.
2) Liquidity positions have to be adjusted (rebalanced) often, or the price will move outside your range and you won’t earn any fees. Every adjustment costs a gas fee.
3) Impermanent loss can be higher.
Concentrated liquidity pools work best when liquidity is deep and volatility is moderate, so that a single trade can’t move the price by much. Higher volatility means more frequent rebalancing to ensure your range includes the current price.
For this reason, small tokens are normally traded in regular (not concentrated) pools. You will, however, find concentrated pools on Uniswap for very volatile but liquid tokens, such as the memecoin $PEPE or the casino token $RLB. A DEX can also have both regular and concentrated pools for the same token pair. Some even have several concentrated liquidity pools for the same pair with different fee tiers.
Uniswap was the first DEX to offer concentrated liquidity on Uniswap v3 in May 2021. Trader Joe on Avalanche followed in August 2022 with Liquidity Book, which has a different architecture.
In April, Uniswap’s Business Source License (BSL) expired, meaning any DEX could fork its V3 code. Soon, other major AMMs on many blockchains introduced concentrated liquidity.
Pontem Network has been working on concentrated liquidity for a while, too. Our solution follows Trader Joe’s Liquidity Book model, as we find it to be more balanced, flexible, and easy to use.
While building our concentrated liquidity solution, we conducted a survey of experienced DEX liquidity providers to get their thoughts on CLMMs . We’ll turn to the results of the survey later in this article. First, let’s compare the main concentrated liquidity AMMs on different blockchains.
Concentrated liquidity on Liquidswap
First of all, the big news: Pontem Network is about to launch concentrated liquidity pools on Liquidswap!
We’ll be the first major DEX on Aptos to launch a CLMM.. Our solution uses bins, just like Trader Joe’s Liquidity Book (keep reading). You’ll be able to choose between a price range and a bin radius and select among several liquidity shapes (Spot, Curve, Bid-Ask, Wide). Also, you won’t have to bother with Uniswap-style NFT positions; Liquidswap pools issue regular LP tokens.
We will start with a limited number of concentrated liquidity pools and gradually add more. While you are waiting, let’s look at other concentrated liquidity solutions that have emerged in the Aptos ecosystem.
The biggest CLMMs by chain: a comparison
For each chain, the protocol with the highest volume is marked in green. An empty cell means that the corresponding CLMM doesn’t operate on that chain. You can see that Uniswap V3 is dominant on five of the top ten blockhains by TVL.
Uniswap V3 (Ethereum)
Uniswap V3 generated $2.52 billion in trading volume and collected $3.24 million in fees in the 7 days between September 2 and September 8, according to @gammastrategies. The dApp has around 150,000 monthly active users, and the TVL is $1.85 billion.
The top pairs by volume include WETH/USDC, WETH/USDT, USDT/USDC, and WETH/WBTC, as well as pairs with smaller tokens like WETH/PNDC and WETH/RLB. WETH/PNDC was the second biggest pair by fees generated: $259,000 in 7 days. This happens often on Uniswap: a relatively small project goes viral to generate massive trading activity for a limited period.
Interestingly, almost 70% of all trades on Uniswap are conducted via V2 pools, but V3 concentrated pools dominate by volume (84%). That’s because heavyweight pairs like ETH-USDC are mostly traded on V3: in fact, concentrated liquidity pools account for 99.2% of all stablecoin swapping volume.
Uniswap V3 has over 14,500 token pairs, though this number pales in comparison to 222,000 pairs on Uniswap V2. 10,000 token pairs are available exclusively on V3.
Uniswap V3 has four fee tiers: 0.01%, 0.05%, 0.3% (same as V2), and 1%. Most pairs with stablecoins are in the 0.05% tier. The 1% fee is used for smaller token to compensate providers for the high volatility risk.
There can be mutiple pools for the same pair different fees. In practice, the majority of liquidity for a certain pair usually accumulates in just one pool, with smaller ones used by providers with specific strategies. When you add funds, Uniswap shows you how liquidity is distributed relative to fee tiers.
On Uniswap V3, every liquidity position is represented by a special NFT. It shows the pair, fee tier, position’s unique ID, and price range.
Uniswap V3 on other chains
Uniswap V3 is the biggest concentrated liquidity protocol on Arbitrum ($120M as of September 6), Polygon ($38M), Optimism (42M), and Base ($5.2M).
In February 2023, the DAO of UNI holders approved deployment on BNB Chain using the Wormhole bridge. The proposal passed with 66% for and 33.5% against, where the main opposition came from Uniswap’s lead investor, Andreessen Horowitz (a16z). The venture firm would have rather used LayerZero, another of its portfolio investments, as the bridge.
(Pontem Network’s Liquidswap DEX also prioritizes LayerZero and their bridging widget is embedded. )
Uniswap V3 went live on BNB Chain on March 15, but so far the daily volume is below $4 million,versus PancakeSwap’s $240 million. Uniswap V3’s volume on Avalanche is also negligible at $0.6M, while Trader Joe’s Liquidity Book CLMM dominates with almost $14 million.
Uniswap v4: a first look
In June 2023, Uniswap released a white paper and the first draft of its V4 code. While anyone can consult the code, V4 will be subject to a 4-year BSL license, so other DEXes won’t be able to fork it, as it was with V3.
All V4 pools will “live” in a single smart contract. But to give liquidity providers more control over pools and funds, V4 introduces “hooks”: plugins that execute specific actions for the pool. For example, providers will be able to have the liquidity that isn’t being used for trading to be deposited into a lending protocol to earn interest. Dynamic pool fees and on-chain limit orders will also become possible, while the DAO will be able to apply protocol fees individually to any pool.
There is no release date yet, but we will keep you posted, so follow the Pontem Network blog!
Trader Joe & Liquidity Book: a very different approach
Liquidity Book is the CLMM solution by Trader Joe, the largest DEX on Avalanche. The technology is completely different from Uniswap V3. Instead of continuous price ranges, Liquidity Book uses bins: small pools within the general pool, each with a fixed price. For example, AVAX-USDT has a bin with the price of 9.85871014, the next one at 9.87842756, the one after that at 9.89818442, etc.
At any point in time, trading takes place in just one bin (the active one), without any price fluctuations or slippage. As users swap, they add and remove tokens from the active bin until there is just one type of token left in it. For example, if the active AVAX-USDT bin is priced 9.85871014 and there is enough demand for AVAX at this price, buyers will keep exchanging USDT for AVAX until there is no AVAX left. At this point, trading will switch to the next bin
Because of this, all bins except for the active one contain just one type of token. This way, you can deposit single-sided liquidity on Trader Joe, which is not offered on Uniswap V3. There is also just one fee tier per pair.
There are several liquidity shapes to choose from: Spot, Curve, and Bid-Ask. Each can be applied to the same price range: the shape determines how your funds will be distributed among the bins in the range. There is a dynamic fee mechanism to compensate providers for impermanent loss when volatility is high. The new Liquidity Book 2.1 also features Autopools that rebalance automatically.
Between Liquidity Book v2 and v2.1, the weekly volume on Avalanche is between $65 million and $90 million. The largest pool by volume is JOE-AVAX, with over $5 millions swapped in 24 hours. This pool is also incentivized with rewards in JOE (Trader Joe’s native token) with a total APR over 300%. It is followed by AVAX-USDC and USDT-USDC.
In February 2023, Liquidity Book launched on Arbitrum. By late March, it became the hotspot for trading ARB after Arbitrum’s airdrop, as Trader Joe offered incentives for ARB liquidity providers. Trading volume reached $350 million a week, making Trader Joe the secondbiggest dApp on Arbitrum. It is now ranked 12th by TVL ($28 million), with an impressive $60 million in weekly volume.
At Pontem, we like the Liquidity Book so much that we based our own upcoming Liquidswap CLMM on it (see below).
Concentrated liquidity on Aptos
Cetus is a concentrated liquidity protocol for Aptos and Sui, although its trading volumes on Aptos are comparatively low at$11,000 a day, compared to $3-400,000 on Liquidswap.
Cetus’s concentrated liquidity pools offer four price range presets: Conservative, Active, Full Range, and Custom. The fee tiers are 0.01%, 0.2%, and 1%, and the APR for the largest pools ranges between 11% and 42%. Note, however, that the biggest pool has only $18,000 in TVL.
PancakeSwap (BNB Chain)
PancakeSwap launched its Uniswap V3 fork on BNB Chain just a few days after Uniswap’s license expired on April 1. Early supporters were airdropped $135,000 in CAKE and exclusive of NFTs.
Weekly volume ranges between $380 million and $910 million, several times smaller than Uniswap. About 150,000 users conduct roughly 450,000 weekly transactions.
PancakeSwap also offers V3 pools on Ethereum, though its 7-day volume on Ethereum is only around $90 million. It has even smaller volumes on zkSync Era, Arbitrum, Polygon’s zkEVM, and Linea.
Just like Uniswap, every liquidity position is minted as an NFT. There are also the same four fee tiers.
The biggest difference is in how these fees are allocated. On Uniswap, liquidity providers get 100% of the fees. By contrast, on PancakeSwap providers get only 67% of the fees; the rest is divided between the protocol treasury and the CAKE token burn program that should support the price of CAKE.
Interestingly, Uniswap has a way to switch on protocol fees built into its code, but it needs to be activated through a DAO vote. However, the most recent proposal to activate the fee switch and allocate 15-20% of the V3 fees to the protocol didn’t pass.
Moreover, PancakeSwap has yield farms for V3 liquidity providers, some of which earn upwards of 100% APR in CAKE. Uniswap doesn’t have a dedicated farming section, though the code allows pool creators to add such incentives.
To summarize: PancakeSwap’s V3 volume on BNB Chain is about 30% of smaller Uniswap’s on Ethereum, and liquidity providers get only ⅔ of the fees. However, they are additionally rewarded through yield farming.
SushiSwap: V3 on 15 chains
Sushi is known for its radical multichain approach: it supports swaps (including cross-chain swaps) on almost 30 blockchains. Sushi V3 pools went live on Ethereum, Arbitrum, and Optimism on April 6, and now they are available on more than 15 chains, including lesser-known ones like Core Blockchain, Fuse, and ThunderCore.
Granted, weekly volume in these pools is in the thousands of dollars, and there are no yield farms attached to them, but the multichain effort is impressive. The protocol plans to gradually roll out concentrated liquidity on all of its supported networks.
Sushi’s biggest V3 pools by trading volume ($1.3 million to $4.3 million a week) are on Base, Arbitrum One, and Ethereum. However, some of them generate only around $1,000 a week in fees, a far cry from the $200,000+ a week in fees in some Uniswap pools. There are some incentivized pools generating over 40% APR, though.
Osmosis: concentrated liquidity on Cosmos
Compared to Uniswap, there are smaller ticks, allowing users to to set tighter ranges.. Also, concentrated liquidity pools (called Supercharged pools) pay daily incentives in OSMO, in addition to swap fees. Soon, it will also be possible to own a managed position that will rebalance automatically.
The available strategies are more intuitive than on Uniswap: Passive, Moderate, Aggressive, and Custom. Depending on the strategy, assets will be deployed in different proportions You can earn an additional 3% APR by locking up) liquidity for 14 days.
The biggest of these “supercharged” pools by volume is OSMO/ATOM with $250,000 swapped daily, while the biggest by liquidity is OSMO/WBTC with $1 million. Total daily volume on Osmosis is around $4 million.
Pontem research: what do liquidity providers think?
In July 2023, we conducted a survey of 36 highly active liquidity providers and traders to get their opinion on the various concentrated liquidity AMMs. These insights helped us design our own concentrated liquidity solution for Liquidswap!
- Out of the 36 respondents, the following number used specific CLMMs:
- Uniswap V3 - 25;
- PancakeSwap V3 - 20;
- SushiSwap V3 - 10;
- Arbitrum Exchange V3 - 10;
- Trader Joe’s Liquidity Book - 9.
- As the main reason for using concentrated liquidity pools over regular pools, 14 providers named better volume and fees for large token pairs, while 13 providers pointed to higher APR. Low slippage matters to just 3 respondents, while low impermanent loss is important to 4 respondents. 4 providers selected flexible pool fees as an important advantage.
- When asked how they pick concentrated liquidity pools, 9 named trading volume as the criterion; 9 named APR; for 6 respondents, liquidity reserves are fundamental; 8 select pools with specific tokens.
- Only 4 respondents said they haven’t experienced impermanent loss on CLMMs. 13 said to have experienced IL but that it wasn’t too bad; while 10 admitted that impermanent loss is worse on concentrated liquidity platforms than on regular AMMs.
- The most frequently cited problem when using CLMMs is that the price often goes outside the provider’s range (8 respondents) and having to rebalance positions often (6). Only 1 person cited technical complexity.
- Among 16 Uniswap V3 users, 9 said they prefer to set a specific range, while 7 prefer the Full Range setting.
- We also asked which new features users would like to see on a concentrated liquidity DEX. We expected yield farming to be the most popular choice, but to our surprise, 13 respondents out of 36 voted for NFT giveaways for liquidity providers, while only 3 want to see yield farms. 5 chose automated rebalancing,
- When asked what would make them try concentrated liquidity on a new blockchain, the most popular answer was lower gas fees. Given that Aptos has extremely low fees (below $0.02), we expect that many will try Liquidswap’s concentrated liquidity pools for this reason. Interestingly, only 2 people listed the opportunity to trade different tokens as a reason to switch to a CLMM on a new chain.
About Pontem Network
Pontem Network is a blockchain product studio building for Aptos, the L1 blockchain known for its sub-second finality and security. our products include:
- Pontem Wallet: the only triple-audited wallet for Aptos with 300,000 installs
- Liquidswap DEX: the most popular DEX on Aptos
- Move Code Playground: the first browser code editor for the Move language;
- ByteBabel: the first Solidity compiler for Move VM;
- The first Intellij IDE plugin for Move, and more.