> [!tldr] What is Meteora? > [Meteora](https://app.meteora.ag/) is a liquidity layer offering products for launching tokens and providing liquidity on Solana. The protocol's dynamic liquidity market maker (DLMM) product takes a novel approach to capital allocation which helps generate attractive returns for liquidity providers (LPs) without relying on third-party incentives. > > **This guide explains Meteora's DLMM vault product, and outlines strategies for liquidity providers (LPs) to maximize profits while minimizing risks like impermanent loss (IL).** # Getting Started Meteora DLMM vaults give liquidity providers (LPs) greater control over their positions than normal automated market maker (AMM) decentralized exchanges (DEXs). This includes the asset mix (e.g., 40/60, 100/0), and the ability to allocate specific portions to defined trading ranges within the asset pair. DLMM positions require more active management but offers the potential for higher returns. **This guide introduces users to DLMM vaults and provides tips on how to navigate them effectively.** >The first section of this guide covers the fundamental concepts of dynamic liquidity market makers (DLMMs), and managing LP positions. > >The second section provides step-by-step instructions for using the Meteora app and configuring different position setups. # What is a Dynamic Liquidity Market Maker (DLMM)? The Dynamic Liquidity Market Maker (DLMM) is Metora's new AMM model for concentrated liquidity. The DLMM model is based on Trader Joe's "liquidity book" model, which segments capital into discrete price bins to increase capital efficiency. For developers and teams, this allows access to new token launch methods, and deeper liquidity for assets. **And for liquidity providers (LPs), this offers:** - **Precise liquidity concentration** = Concentrated liquidity allows for more LP strategies. - **Dynamic fees** = The more the active trading bin passes over bins in your position, the more fees your position earn. - **Zero-slippage price bins** = Swaps that happen within the same price bin do not suffer from slippage. Meteora DLMM vaults can help LPs achieve higher returns than other decentralized exchanges (DEXs), however, these vaults come with a few risks. **Here are some of the risks & concerns of Meteora DLMM vaults:** - Manual management, which involves: - Withdrawing/ depositing funds to rebalance position - Swapping assets (which incur fees) - Possibility of Impermanent Loss (IL) ## What is Bin-style concentrated liquidity? > [!example] Primer on Liquidity Provision: > Providing liquidity involves supplying assets for others to trade in a market. In exchange for this, you earn fees based on the trading volume your assets support. > > **Concentrated liquidity** is a newer innovation that allows liquidity providers to focus their assets within specific price ranges, making their capital more efficient. Meteora uses a form of concentrated liquidity known as **bin-style liquidity**, which separates your liquidity position (LP) into discrete price bins. Each bin corresponds to a segment of the LP's trading price range. Reserves deposited in a liquidity bin are made available for exchange at the price defined for that bin. >Bin sizes are controlled by the bin-step (set by the creator of the pool). I.e. a bin-step of 1 covers 0.01% of the trading price. ![[Drawing 2024-09-09 19.49.11.excalidraw.png]] ### Meteora vs. Uniswap V3 concentrated liquidity If you're familiar with Uniswap V3 (on EVM chains) then you've probably heard about concentrated liquidity. However, Meteora uses a variation of concentrated liquidity more akin to Trader Joe's Liquidity Book (on Avalanche network). **Here's the difference between Uniswap's tick-style and Meteora's bin-style:** on Meteora, liquidity is aggregated vertically within each bin. In contrast, on Uniswap V3, liquidity is aggregated horizontally via price 'ticks'. The main benefits of vertical aggregation (bin-style) are: - Fungible Liquidity - Greater capital-efficiency Simply put, while Uniswap allows you to control the price ranges of liquidity, Meteora allows you to control price ranges AND allocate different portions of your liquidity across the price range dynamically. ![[Drawing 2024-09-09 19.55.50.excalidraw.png]] ## How price shifts affect LP positions Assuming you open a position with 50/50 of each asset, all bins to the left of the active bin will contain only X (quote asset) and all bins to the right will contain only Y (base asset). > [!example] What are Base and Quote assets? > Example: SOL/USDC > > - **Base asset** = The primary asset in trading pair. The asset that you are buying or selling (i.e SOL) > > - **Quote asset** = This is the secondary asset in a trading pair. the asset in which the price of the base asset is denominated. (i.e USDC) The only bin that contains reserves of both X and Y is the 'active price bin'. When the price of the base asset increases in relation to the quote asset, the active bin moves to the right and the previous active bin is converted to the quote asset. Simply put, if the price of SOL rises in a SOL/USDC LP, Meteora will sell your SOL for USDC. And if SOL continues to increase in price and the active price bin exceeds your positions price range, you'll have all USDC. The reverse is also true. ![[Drawing 2024-09-09 19.53.07.excalidraw.png]] *SOL/USDC price bin example* Things are simple when you're LP'ing into SOL/USDC or stable pairs, but what happens if both assets are volatile (i.e. if the quote asset is SOL or another asset)? To understand how price movements of the quote or base asset will affect your position, here are some simple guidelines. **Overall, there are about 3 different scenarios when it comes to price movements, including:** 1. **Base asset becomes more valuable** When the base asset becomes more valuable (in comparison to the quote asset) you are left with the quote asset. If we compared the price movements of both assets it would look something like this, theoretically: ![[Drawing 2024-09-09 22.54.38.excalidraw.png]]![[Drawing 2024-09-11 21.55.41.excalidraw.png]] 2. **Quote asset becomes more valuable** When the quote asset becomes more valuable (in comparison to the base asset) you are left with the base asset. The reverse of the first scenario. ![[Drawing 2024-09-11 21.40.42.excalidraw.png]]![[Drawing 2024-09-11 21.55.41.excalidraw 1.png]] 3. **Base and Quote asset are correlated (= balanced position)** When both assets are closely correlated, your position should stay relatively balanced -assuming both assets move in a manner where the conversion rate between the two stays steady. The position will fluctuate back and forth, but if you have a wide enough price range your position should remain active more often than not.![[Drawing 2024-09-11 21.40.42.excalidraw 1.png]] In the event that both prices are correlated while experiencing downward price action, you're LP position should still remain active, however the total value of your position will rapidly decrease. ![[Drawing 2024-09-12 00.28.06.excalidraw.png]] ### Assessing LPs with the Correlation Coefficient An easy way of viewing price correlations in one chart is the **Correlation Coefficient (CC)**. The CC is a statistical measure of how correlated two assets are. It's measured on a scale from -1 - +1. It's positive (+1) when both assets move in the same direction, either up or down, ad its negative (-1) when the two assets move in completely opposite directions. Rule of thumb: a CC of < 0.5 is good and a CC of > 0.5 is poor. Let's look at a few examples: #### JUP/SOL ![[Screenshot 2024-09-11 230627.png]] Source: [Meteora Crypto Correlation Dashboard](https://flipsidecrypto.xyz/defi_kai/correlation-coefficient-for-popular-meteora-pairs-V3WBVc) Over the 3-month period from June 2024-August 2024, the weakest correlation coefficient between JUP and SOL was 0.843, and the average correlation coefficient over this period was 0.943. The correlation between these tokens is very strong, meaning your position would be more likely to hover around your active price range and or return back to the original position, given enough time. #### FWOG/SOL ![[Screenshot 2024-09-11 231515.png]] Source: [Meteora Crypto Correlation Dashboard](https://flipsidecrypto.xyz/defi_kai/correlation-coefficient-for-popular-meteora-pairs-V3WBVc) From July 2024-August 2024, the FWOG/SOL pair has experienced an inconsistent correlation (mainly due to FWOGs volatility). The average correlation coefficient over this period was 0.485. In the end, there's no way to predict prices, however correlation coefficient, combined with other on-chain data like pool liquidity, volume, and fees, can help farmers make calculated bets when choosing LPs. Other uses of Correlation Coefficient include: - Finding correlated assets for lending/borrowing opportunities - Spotting opportunities for portfolio diversification - Finding app-layer tokens that track (are closely correlated) to their L1 or L2 network they're deployed on - More! # How to use the Meteora app (Step-by-step) Now that we know how Meteora works, concentrated liquidity, and about picking pairs in theory, let's put it into practice and review some strategies for creating and managing positions. Head over to the [Meteora DLMM page](https://app.meteora.ag/dlmm) and pick a trading pair to provide liquidity for. After selecting an LP pair, there are three steps: 1. Toggle 'Auto-Fill' for a 50/50 split of each asset. 2. Select a strategy ![[Drawing 2024-09-11 23.22.43.excalidraw.png]] 3. Use the sliders to select a range of liquidity A tighter (more concentrated) range captures more fees but is susceptible to trading out side of your range. A wider range provides more stability (and leaves room for fluctuations in correlation), but captures less fees. ![[Drawing 2024-09-11 23.23.59.excalidraw.png]] After setting your position, you can deposit the funds. You'll have the ability to withdraw and add liquidity for either asset, claim fees, and close your position. ## Fees At present, Meteora charges a x fee as rent (refundable), and a x fee to open the position (non-refundable). If you withdraw fund from an open position, you can choose to keep the position open, which allows you to deposit fund later (with the same strategy and trading price). Or you can close the position and reclaim the x rent fee. ## Meteora Strategies Now, let's talk strategies. Meteora gives depositors the ability to provide any amount of liquidity for either asset. You are not restricted to adding a 50/50 split of each asset, like most decentralized exchanges (DEXs). For instance, for the SOL/USDC pair, you could provide $100 in SOL and $500 in USDC, or you could even choose to provide *only* USDC. However, keep in mind that if you only provided USDC, and the price of SOL increases after your deposit, your position will not have an active bin. Moreover, the price of SOL relative to USDC would have to decrease for your position to be largely in the active bin. Overall, the ability to choose asset amounts and select 'strategies' to shape your liquidity offers the flexibility to come up with many different setups. Here are 3 setups to get you started: #### Setup #1: Stable-pair LP When providing stable pairs like USDC/USDT and SOL/jitoSOL you should use a spot strategy. Provide liquidity evenly across each bin, and make the range tighter for pairs that trade closer to parity. ![[Pasted image 20240911234351.png]] ### Setup #2: DCA-in If you think the price of SOL will drop and you'd like to DCA-in, you can provide *only* USDC and setup a Bid-ask strategy. This way, your USDC will be progressively converted to SOL as prices drop. Other benefits include: - Capture swap fees - no swap fee to swap from USDC to SOL - Progressively increase SOL position ![[Pasted image 20240911234507.png]] ### Setup #3: DCA-out If you hold SOL and you'd like to take profits you can DCA-out. To perform this you can provide *only* SOL liquidity and set up a bid-ask strategy. This way, your SOL will be progressively converted to USDC as prices increase. Other benefits include: - Capture swap fees - no swap fee to swap from USDC to SOL - Progressively take profits ![[Pasted image 20240911234607.png]] # Closing Thoughts/ Resources Learn more about Meteora: [Meteora docs](https://docs.meteora.ag/the-massive-meteora-stimulus-package/1.-dynamic-liquidity-market-maker) Trading tools & analytics: [[Blockchain Analytics & News]]