CLMM: Concentrated Liquidity Market Makers

Understanding how Uniswap V3’s concentrated liquidity solves capital efficiency through custom price ranges and tick-based architecture

Concentrated Liquidity Market Makers (CLMM) represent the first major evolution from traditional AMMs, introducing the ability to concentrate liquidity within custom price ranges rather than spreading it across infinite ranges.

Prerequisites

Before exploring CLMMs, you should understand:

• AMM Fundamentals - Traditional x×y=k mechanics and uniform distribution
• Capital Efficiency Crisis - Why traditional AMMs waste 99.5% of liquidity

Key Concepts You’ll Learn

• Custom price ranges: How LPs can choose specific price intervals instead of 0→∞
• Tick-based architecture: How continuous price space is divided into discrete ticks
• Capital efficiency gains: Real improvements of up to 4,000x over traditional AMMs
• Active vs inactive liquidity: When positions earn fees and when they don’t

What is CLMM?

CLMM (Concentrated Liquidity Market Maker) allows liquidity providers to allocate tokens within selected price ranges where they will be actively used, instead of distributing liquidity uniformly across infinite price ranges.

The Innovation: Custom Price Ranges

Traditional AMM Problem:

Price Range: [0 ────────────────────────────── ∞]
LP Capital:  [═════════════════════════════════]
Active Use:  [        unused       ][0.5%][unused]

CLMM Solution:

Price Range: [0 ──[Selected Range]────────── ∞]
LP Capital:  [    [████████████████]           ]
Active Use:  [    [████████████████]           ] ← 100% utilization within range

Uniswap V3: The First CLMM Implementation

Historical Context

Uniswap V1/V2 Limitations:

• Liquidity distributed uniformly from 0 to infinity
• Most liquidity never used (stablecoin pairs trade 99% within $0.99-$1.01)
• Poor capital efficiency for LPs
• High slippage for large trades

Uniswap V3 Innovation (March 2021):

• Introduced concentrated liquidity as first major CLMM
• Allowed custom price ranges for liquidity provision
• Achieved massive capital efficiency improvements

Technical Architecture: Ticks

Tick System: To achieve concentrated liquidity, continuous price space is partitioned with ticks.

How Ticks Work:

• Tick spacing: Each tick represents 0.01% price change
• Discrete boundaries: Ticks are boundaries between price areas
• Position definition: LPs choose tick ranges for their positions

// CLMM Tick Example
interface CLMMPosition {
  tickLower: number;    // e.g., tick -200 = price $1.98
  tickUpper: number;    // e.g., tick +200 = price $2.02
  liquidity: number;    // Amount of liquidity in this range
  tokensOwed: {
    token0: number;     // Fees earned in token 0
    token1: number;     // Fees earned in token 1
  };
}

// Price calculation from tick
const tickToPrice = (tick: number) => 1.0001 ** tick;
const priceToTick = (price: number) => Math.log(price) / Math.log(1.0001);

CLMM vs Traditional AMM Comparison

Capital Efficiency Improvements

Real Uniswap V3 Data:

Metric	Traditional AMM	CLMM	Improvement
Capital Utilization	~0.5%	50-90%	100-180x
Maximum Efficiency Gain	1x	4,000x	4,000x
Trading Volume	Baseline	5x higher	5x
LP Fee Concentration	Spread thin	Concentrated	10-50x

Practical Examples

Stablecoin Pool Efficiency (DAI/USDC):

Traditional AMM: $25M spreads across 0→∞
CLMM (0.99-1.01): Same $25M = $5B equivalent depth (200x improvement)
CLMM (0.999-1.001): Same $25M = $50B equivalent depth (2,000x improvement)

Individual LP Performance:

Traditional Position: $100,000 spread across all prices
CLMM Position: $20,000 in tight range provides same liquidity depth
Capital Saved: $80,000 (can be deployed elsewhere)
Efficiency Gain: 5x improvement

How CLMM Positions Work

Active vs Inactive Liquidity

Active Position (Current price within range):

• Position earns trading fees
• Both tokens present in position
• Liquidity actively used for trades
• Continuous fee accumulation

Inactive Position (Current price outside range):

• Position earns NO fees
• Only one token type remains
• Liquidity not used for trades
• Waiting for price to return to range

Position Management Examples

Example 1: ETH/USDC Position

const ethPosition = {
  currentPrice: 2000,
  positionRange: [1800, 2200], // ±10% range
  status: 'active',             // Price within range
  feeEarning: true,             // Earning fees
  composition: {
    eth: 0.5,                   // 50% ETH
    usdc: 1000                  // 50% USDC
  }
};

// If ETH price rises to $2300
const updatedPosition = {
  currentPrice: 2300,
  positionRange: [1800, 2200], // Same range
  status: 'inactive',           // Price above range
  feeEarning: false,           // No fees earned
  composition: {
    eth: 0,                     // 100% converted to USDC
    usdc: 2000                  // All USDC
  }
};

CLMM Strategies

1. Narrow Range Strategy

Best for: Stablecoins, maximum capital efficiency

Range: $0.998 - $1.002 (0.4% width)
Capital Efficiency: Up to 4,000x improvement
Risk: High - easily goes out of range
Management: Requires frequent rebalancing

2. Wide Range Strategy

Best for: Volatile pairs, passive management

Range: $1,500 - $2,500 (33% width)
Capital Efficiency: 3-10x improvement
Risk: Lower - stays in range longer
Management: Less frequent rebalancing needed

3. Multiple Position Strategy

Best for: Professional LPs, risk management

Position 1: Narrow range (high efficiency)
Position 2: Medium range (balanced)
Position 3: Wide range (safety net)

Economic Impact and Performance

Real-World Adoption Data

Uniswap V3 Success Metrics:

• $2+ trillion in total trading volume since launch
• 5x higher trading volume than V2 pools
• Approaching CEX efficiency in price discovery
• Professional market maker adoption for institutional liquidity

Fee Generation Analysis

Traditional AMM Fee Distribution:

Total Pool: $10M
Daily Volume: $100K  
Daily Fees: $300 (0.3%)
Per $1 LP Capital: $0.00003 daily (terrible)

CLMM Fee Distribution:

Active Liquidity: $500K (5% of pool in active range)
Daily Volume: $100K (same volume)
Daily Fees: $300 (same fees)
Per $1 Active Capital: $0.0006 daily (20x better)

CLMM Limitations and Challenges

1. Active Management Required

Traditional AMM: Set and forget CLMM: Must monitor and adjust positions

2. Impermanent Loss Risk

Concentrated IL: Can be several times higher than traditional AMMs when price moves outside range

3. Technical Complexity

Gas Costs: More complex operations = higher transaction fees User Interface: Requires sophisticated tools for position management Education: Users need deeper understanding of price ranges and risks

CLMM vs DLMM: The Next Evolution

Based on the resource files, CLMMs have a critical limitation that DLMM solves:

CLMM Limitation: Still has slippage within price ranges due to x×y=k formula DLMM Innovation: Zero slippage within discrete bins using A+B=C formula

CLMM (Uniswap V3): Custom ranges but still slippage within ranges
DLMM (Meteora): Discrete bins with zero slippage within each bin

When to Use CLMM

Ideal Scenarios:

• High-volume pairs where active management pays off
• Stablecoin pairs with predictable trading ranges
• Professional LPs capable of position optimization
• Protocols needing better capital efficiency than traditional AMMs

Not Recommended For:

• Long-tail assets with unpredictable price discovery
• Set-and-forget LPs preferring passive strategies
• Extremely volatile pairs where ranges are impossible to predict

Key Takeaways

CLMM Advantages:

1. Massive efficiency gains: Up to 4,000x capital efficiency improvement
2. Higher fee capture: Concentrated liquidity earns more fees per dollar
3. Better execution: Deeper liquidity reduces slippage
4. Flexible strategies: Custom ranges for different market conditions

CLMM Requirements:

• Active position management and monitoring
• Understanding of price range selection
• Risk tolerance for concentrated impermanent loss
• Access to sophisticated management tools

Next Steps

After understanding CLMM fundamentals:

1. Concentrated Liquidity Fundamentals - How DLMM builds on CLMM to achieve zero slippage
2. Bin Architecture Deep Dive - Technical implementation of DLMM’s discrete bins
3. Traditional vs DLMM Decision Guide - When to choose different AMM approaches

CLMM represents the critical evolutionary step from traditional AMMs to modern liquidity solutions, introducing custom price ranges and concentrated capital efficiency while laying the foundation for DLMM’s zero-slippage innovations.