CLOBr Logo

Liquidity and Pools

How liquidity pools work, constant product vs concentrated, and impermanent loss.

Understanding Liquidity

Liquidity is how easily you can buy or sell without moving the price. High liquidity = lots of buyers and sellers, tighter spreads, less slippage. Low liquidity = your trade moves the market.

Why Liquidity Matters

  • Price Stability: More liquidity = less price impact per trade
  • Execution: Bigger orders fill without getting wrecked by slippage
  • Market Health: Liquid markets recover faster from shocks
  • Trading Strategy: Knowing where liquidity sits helps you time entries and exits

In TradFi, market makers provide liquidity by constantly quoting bids and asks. In DeFi, liquidity pools and their providers do the same job.

Liquidity Pools Explained

Smart contracts holding pairs of tokens. You trade against the pool, not another person. No order book needed.

How Traditional (Constant Product) Liquidity Pools Work

Basic Mechanics

  1. LPs deposit equal values of two tokens into a pool
  2. Those deposits create a market others can trade against
  3. A formula (usually x*y=k) sets the price automatically
  4. Every swap pays a fee that goes to LPs
  5. LPs can withdraw their share plus earned fees anytime

The classic formula used by many AMMs is x * y = k, where:

  • x is the quantity of token A in the pool
  • y is the quantity of token B in the pool
  • k is a constant that doesn't change after trades (ignoring fees)

When someone swaps, they add one token and remove the other. The product k stays constant, which creates a smooth price curve -- the more of a token you buy, the more expensive the next unit gets.

Concentrated Liquidity

Instead of spreading capital from price 0 to infinity, LPs pick a specific range. Same capital, way more liquidity where it counts.

How Concentrated Liquidity Works

Instead of spreading liquidity from 0 to infinity, LPs choose:

  1. A lower price bound where their liquidity begins to be used
  2. An upper price bound where their liquidity stops being used
  3. The amount of each token to deposit within that range

Benefits include:

  • Capital Efficiency: Way more bang per dollar deposited vs. constant product pools
  • Customizable Strategy: Target the price range where you expect trading to happen
  • Higher Returns: Tighter ranges earn more fees per dollar -- but carry more risk
  • Price Discovery: Creates visible support and resistance levels
Concentrated liquidity vs traditional liquidity

Concentrated liquidity vs "traditional" constant product liquidity

Concentrated Liquidity and Market Structure

When lots of LPs pile into similar price ranges, they create liquidity walls. Price has a hard time pushing through these levels.

How Liquidity Walls Form

Liquidity walls typically form at:

  • Psychologically significant levels: Round numbers like $10, $100, $1000
  • Technical levels: Major support/resistance from previous price action
  • Strategy-based ranges: Levels where LPs expect trading to occur
  • Popular default ranges: Many platforms suggest ranges that become crowded

The more LPs stack up at a price level, the bigger the wall and the harder it is for price to break through.

Impermanent Loss: A Key Risk

The main risk for LPs. If token prices move significantly, you can end up worse off than if you'd just held the tokens.

Understanding Impermanent Loss

Impermanent (or "divergence") loss occurs because:

  1. When you provide liquidity, the pool maintains a ratio between tokens
  2. As prices change, the pool automatically rebalances, selling the appreciating token
  3. If you had simply held the tokens instead, you would have gained more from the price increase
  4. The loss is "impermanent" because it could reverse if prices return to the original ratio

Concentrated liquidity reduces IL when prices stay in your range, but makes it worse when price moves out.

Liquidity Pools on Solana

Solana settles in seconds and costs fractions of a cent, which makes it well-suited for high-frequency DEX trading. The main platforms:

PlatformLiquidity TypeKey FeaturesCLOBr Integration
RaydiumConstant Product (CPMM)
Concentrated (CLMM)		Long- or short-range position management, high volumeFull integration
OrcaConstant Product (Splash Pools)
Concentrated (Whirlpools)		User-friendly interface, Whirlpools offer "full-range" concentrated liquidityFull integration
MeteoraConstant Product (Dynamic AMM)
Concentrated (DLMM)		Advanced DLMM (Bin sizing and fees, Range Allocation Strategies), Strong LP CommunityFull integration
JupiterN/A (Aggregator)Limit orders, DCA orders, best price routingOrder data integrated
Pump.funConstant ProductTokens "graduate" to PumpSwap (Pump.fun's DEX)Full integration

Liquidity and CLOBr

CLOBr pulls liquidity data from multiple sources and visualizes it in one place:

  • Concentrated liquidity positions across Raydium, Orca, and Meteora
  • Limit (Trigger) orders from Jupiter
  • DCA (Recurring) orders from Jupiter (pro-rated to show their 24-hour impact)

Aggregated into 1% price buckets, this shows you:

  • Support (buy walls) that can stop prices from falling
  • Resistance (sell walls) that can cap rallies
  • Liquidity gaps where price can move fast with little resistance
  • Market structure you won't see on a price chart

Traders use this to time entries and exits. LPs use it to decide where to put capital.