AMM vs CPMM Liquidity Pools
Complete guide to understanding Automated Market Makers and Concentrated Liquidity on Solana.
TL;DR - Quick Summary
AMM = Simple, safe, works at any price. Best for new tokens. CPMM = Complex, higher returns, requires management. Best for stable tokens. Start with AMM, consider CPMM later.
Table of Contents
What is AMM (Automated Market Maker)?
The Constant Product Formula: x * y = k
AMM pools use a simple mathematical formula where the product of both token reserves always stays constant. This spreads your liquidity across ALL possible prices, from $0 to infinity.
AMM Liquidity Distribution
Liquidity is spread evenly across all price ranges
How It Works
- 1. You deposit Token A and Token B in equal value
- 2. Formula maintains: TokenA * TokenB = Constant
- 3. Trades adjust prices based on supply/demand
- 4. You earn fees from every trade
Example
With 1000 SOL + 1M tokens (k = 1 billion), if someone buys tokens, the pool rebalances to maintain k=1B. Price changes automatically based on the ratio.
What is CPMM (Concentrated Liquidity)?
Concentrated Positions: Focus Your Capital
CPMM lets you choose a specific price range for your liquidity. Your capital only works within that range, but it's much more efficient when the price stays there.
CPMM Liquidity Distribution
Liquidity is concentrated within your chosen price range (much deeper)
How It Works
- 1. You choose a price range (e.g., $0.001 - $0.01)
- 2. Deposit tokens for that specific range
- 3. Earn fees ONLY when price is in range
- 4. Higher capital efficiency = more fees per $
Capital Efficiency
A tight range can be 4000x more capital efficient than AMM. $100 in CPMM can provide same liquidity as $400,000 in AMM for that specific range!
Visual Comparison
| Aspect | AMM | CPMM |
|---|---|---|
| Liquidity Distribution | All price ranges | Custom ranges |
| Capital Efficiency | Low (spread thin) | High (concentrated) |
| Management Required | Set and forget | Active rebalancing |
| Fee Earnings | Lower but consistent | Higher when in range |
| Impermanent Loss | Predictable | Can be severe |
| Best For | New/volatile tokens | Stable tokens |
| Complexity | Simple | Advanced |
| Risk Level | Lower | Higher |
Pros & Cons
AMM (Automated Market Maker)
Pros
- Simple to set up and manage
- Works at any price - no range selection needed
- Predictable impermanent loss
- Perfect for volatile/new tokens
- No active management required
- Consistent (though lower) fees
Cons
- Lower capital efficiency
- Earns fewer fees per dollar
- Most liquidity never used
- Higher slippage for traders
CPMM (Concentrated Liquidity)
Pros
- Extremely high capital efficiency
- Much higher fee earnings when in range
- Better for traders (less slippage)
- Customizable strategies
- Up to 4000x more efficient than AMM
- Professional liquidity management
Cons
- Complex to manage effectively
- Requires active monitoring
- Risk of 100% impermanent loss if out of range
- Not suitable for volatile tokens
- Higher gas costs for repositioning
Important Warning About CPMM
If the price moves outside your CPMM range, your position becomes 100% one token (the less valuable one), and you stop earning fees entirely. This can result in significant losses if you don't actively manage your position. Only use CPMM if you understand these risks and can monitor your positions.
Which Should You Use?
Decision Matrix
Choose AMM if:
- New token launch
- Unpredictable price
- Want simplicity
- Can't monitor daily
- Meme coins
- First-time LP
Choose CPMM if:
- Established token
- Stable price range
- Want max returns
- Can monitor actively
- Understand DeFi
- Large capital
Raydium on Solana
Raydium supports both AMM and CPMM pools. SPL Token Launcher currently integrates with CPMM for new pool creation. For standard AMM pools, use Raydium directly or Smithii.
Frequently Asked Questions
AMM (Automated Market Maker) uses a constant product formula (x*y=k) to spread liquidity evenly across all possible prices. CPMM (Concentrated Position Market Maker) allows you to concentrate liquidity within specific price ranges, making your capital work harder. Think of AMM as a wide safety net, while CPMM is a targeted cushion.
For new tokens, AMM is generally safer because price discovery is unpredictable. With AMM, you're covered at any price. CPMM is better for established tokens where you can predict price ranges. New tokens should start with AMM, then consider CPMM after price stabilizes.
Impermanent loss occurs when the price ratio of pooled tokens changes. In AMM, IL is predictable based on price movement. In CPMM, IL can be more severe if price moves outside your range, but you also earn more fees when price stays in range. CPMM amplifies both gains and losses.
Yes, you can remove liquidity from an AMM pool and add it to a CPMM pool at any time. This is a common strategy: start with AMM for price discovery, then migrate to CPMM for higher returns once the price stabilizes.
SPL Token Launcher currently supports CPMM pool creation through our Add Liquidity feature. For AMM pools, we recommend using Smithii or Raydium directly. We're working on full AMM support for future releases.
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