Core Concepts

Concentrated Liquidity

Concentrated liquidity is the fundamental innovation of CLMMs. Instead of providing liquidity across the entire price spectrum, liquidity providers (LPs) can choose a specific price range in which their capital will be used for trades. This allows for a much more efficient use of capital.

For example, for a stablecoin pair like USDC/USDT, the price is expected to stay within a very narrow range (e.g., $0.99 to $1.01). With a CLMM, an LP can provide liquidity only within this range, earning fees on all trades that happen within it, without needing to have their capital sit idle covering price ranges that are unlikely to be reached.

Price Ranges and Ticks

The price curve in Magma's CLMM is not continuous. Instead, it is divided into discrete "ticks." When LPs provide liquidity, they do so between two ticks, which defines their price range.

• Ticks: Each tick represents a specific price point. The price difference between ticks is smaller at lower prices and larger at higher prices.

• Price Range: An LP's position is defined by an upper and a lower tick. Their liquidity is active only when the market price is within this range.

When the price moves in and out of an LP's chosen range, their position will be either entirely in one asset or the other. This is similar to the concept of impermanent loss in traditional AMMs, but with the added dimension of the position becoming inactive if the price moves outside the defined range.

Liquidity Positions as NFTs

Each concentrated liquidity position is unique, with its own price range. To represent this, each position is minted as a Non-Fungible Token (NFT). This NFT tracks the details of the position, including the amount of liquidity, the chosen price range, and the fees accrued.

This NFT representation makes the liquidity positions themselves tradable and transferable, opening up new possibilities for secondary markets and more complex DeFi strategies.