Solana is preparing for the next DeFi wave with concentrated liquidity management from DailyCoin

Solana is preparing for the next DeFi wave with concentrated liquidity management

Solana is capable of handling massive amounts of trading volume. It has been argued that the network is the only public blockchain on which high-frequency trading (HFT) can thrive, but still has a long way to go before it can match NASDAQ in volume.

On the tech front, Jump Crypto — one of the most successful names in the HFT — has been tasked with improving Solana’s core infrastructure. On the economic front, a project called Kamino Finance recently developed easy-to-use automated liquidity management solutions to mine deep liquidity for the network’s next-generation decentralized exchanges (DEXs).

These DEXs have exponentially increased their ability to facilitate decentralized trades with maximized capital efficiency through Concentrated Liquidity Market Makers (CLMMs). Still, they struggle to attract user liquidity due to their complexity. In short, CLMMs need an extra boost before they can go mainstream.

Concentrated Liquidity Wasn’t User-Friendly The first CLMM was released with the launch of V3 in early 2021, heralded as a paradigm shift in decentralized finance (DeFi). The efficient Automated Market Makers (AMMs) that supported Uniswap V2 were welcomed to be replaced by CLMMs.

The upgrade allowed traders to benefit from slippage-free swaps and liquidity providers (LPs) had the opportunity to increase their earned fees. Crypto media has been heavily touting that LPs could increase their capital efficiency by 4,000x, and it looked like DeFi would attract massive amounts of liquidity from market makers.

However, six months after the launch of Uniswap V3, studies showed that more than 50% of users who had provided concentrated liquidity would have been better off keeping their tokens simple. Immanent Loss (IL) exceeded gains by a healthy margin for most LPs.

At the time these studies were published, DeFi’s total locked value (TVL) was reaching all-time highs (ATHs), but Uniswap V2 still attracted more liquidity than its upgrade. Although Uniswap V3’s concentrated liquidity pools consistently attracted twice the trading volume of V2, LPs were not interested in the risks involved in maximizing their returns.

Automated liquidity management helped Uniswap V3 turn around Uniswap V2 Currently, Uniswap V3 handles many times the volume than its predecessor and has also managed to attract more liquidity than Uniswap V2. At the time of writing, Uniswap V3 smart contracts hold 4 times more liquidity than Uniswap V2.

What happened? Arrakis Finance, a protocol to automate Uniswap V3 positions on behalf of LPs. Arrakis is now responsible for providing the majority of DAI liquidity on Uniswap and has accumulated an impressive TVL during the bear market.

According to DeFi Llama, users have deposited over $1.3 billion worth of tokens into Arrakis smart contracts, placing the protocol just two spots outside of the DeFi top ten.

For DAI, the stablecoin has reached incredibly deep liquidity as a by-product of managed Uniswap V3 positions. For example, switching from DAI to USDC has no price impact on trades up to $200 million in DAI, an impressive statistic for a DEX – the capital efficiency demanded by institutional traders.

Combining Optimized Liquidity Vaults with Solana’s Next Generation DEXs The combination of concentrated liquidity and automated liquidity management has been proven to be more capital efficient for trades executed on . Nonetheless, the network’s throughput of 15 transactions per second (TPS) and its cost per transaction prevent Ethereum from becoming a venue for high-volume traders who rely on speed.

Solana, on the other hand, can reach speeds of up to 50,000 TPS on transactions costing less than a cent. All the network needs is the infrastructure to sustain this performance and of course users providing liquidity for trading.

With the launch of Kamino Finance, Solana’s next-generation DEXs will experience an increase in capital efficiency while facilitating trading on one of the fastest blockchains currently available. If history repeats itself, the CLMM-powered DEXs that Kamino is built on should see a surge in liquidity.

As with Uniswap V3’s CLMM pools and Uniswap V2’s AMM pools, Orca’s CLMM whirlpools currently hold half the liquidity deposited in Orca’s traditional AMM pools. Additionally, Orca’s hot tubs handle many times the volume than their AMM counterparts, reminiscent of last year’s Uniswap.

All-Around Enhancements for Liquidity Providers By facilitating higher trading volumes, Orca’s whirlpools earn significantly higher total weekly fees than regular pools. At the time of writing, hot tubs’ weekly earnings are around $65,000, while standard pools have earned around $2,000 in LPs over the same period.

Still, the massive difference in fee accrual hasn’t encouraged users to provide concentrated liquidity. The difficulty of constantly rebalancing positions, manually calculating fees, and mitigating IL turns many users off, even if it costs LPs less than a penny in transactions to constantly rebalance and optimize their positions.

On Solana, Kamino can leverage high speeds and low-cost transactions to automatically keep users’ positions in an optimal range for earning fees. In addition, Kamino automatically adds fees and premiums to liquidity positions, increasing each LP’s share of concentrated liquidity pools.

When managing concentrated liquidity is reduced to pressing a button to deposit funds, it couldn’t be easier for LPs to start generating optimized returns. This could stimulate a new wave of users to get involved in DeFi by providing liquidity.

The future infrastructure of high-speed decentralized trading Imagine a trading platform that offers security, speed and immutability of records unmatched by any currently available system. This dream could become a reality with the adoption of blockchain technology by institutional traders.

DEXs that provide concentrated liquidity on Solana may have the potential to create this idyllic trading environment, but they lack one of the key ingredients that makes any decentralized system tick: a positive user experience.

Fortunately, the pieces of the puzzle may come together sooner or later. Speed, efficiency, and a user-friendly interface might be the final recipe to bring HFT into the decentralized trading sphere.

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