Seems there is a lot of confusion surrounding the idea of a proactive market maker, and how it differs from Uniswap V3/CLMM models.
*This is not an in-depth breakdown, I am just highlighting some of the obvious differences between a PMM and CLMM or Uniswap V3 model (there are more differences).*
Let’s discuss how they differ in Oracle usage and concentrated liquidity usage.
It’s important to note that each protocol iterates on its chosen model to achieve different results
**CLMM/ Uniswap V3**
CLMMs use concentrated liquidity in the following way:
>For instance, in the range of $20-$30, there could be a tick for $21 tokens, $22 tokens, and so on. The tokens remain supplied in these ticks until they are withdrawn, and an LP cannot receive fees if the market value of the tokens they’ve supplied moves outside their set range.
Furthermore, models like Uniswap V3 do not use a standard price oracle, instead, it creates its own: ” If we have native on-chain exchanges, why would we need to fetch prices from outside? This is how the Uniswap price oracle works. Thanks to arbitraging and high liquidity, asset prices on Uniswap are close to those on centralized exchanges. So, instead of using centralized exchanges as the source of truth for asset prices, we can use Uniswap, and we don’t need to solve the problems related to delivering data on-chain (we also don’t need to trust to data providers). ”
Proactive market makers use concentrated liquidity, but it’s in conjunction with other mechanics, including oracles and a rebalancing method. When the price moves out of the concentrated liquidity range, the oracle helps to determine where the liquidity should concentrate next. LPs are always providing liquidity when entering LPs on a PMM.
Also, from a user perspective, you CANNOT choose specific ranges of liquidity for PMMs. You simply just enter the pool and let it do its thing (proactive market make; buy low, sell high).
It’s also worth noting that PMMs like Lifinity use Pyth, as their oracle, instead of creating one.
There are many other differences, and this has actually inspired me to produce a write-up.
I remain humble when I am proven wrong but I also dislike being misled when people are trying to inform me about something they have not done DD on.
3 thoughts on “Concentrated Liquidity Market Makers (CLMMs) vs. Proactive Market Makers (PMMs)”
This is cool, thanks for the writeup. Can you touch on possible reasons why relying on an external oracle like Pyth is preferred over Uni V3 model?