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Decentralized Finance (DeFi) is a financial sector that is less than a decade old and is picking up steam. Within the past two years, DeFi has erupted across the ecosystem with growth and innovation, and improvements are constantly being made in how decentralized applications (dApps) provide better and more capital-efficient services.
However, innovations are not always quickly embraced by the DeFi community, and the launch of the Concentrated Liquidity Market Maker (CLMM) is one of those capital-efficient advances that most users are giving the cold shoulder to. CLMMs make trading crypto on a decentralized exchange (DEX) hyper-efficient, but they are beyond challenging to use.
Kamino Finance launched Solana to address these issues. By innovating automated vaults that reduce the complexity of handling high-tech CLMMs, Kamino makes one of the most capital-efficient tools in DeFi easier than ever.
Trading hours were tough ahead of the CLMM
Before the CLMM, users assumed that when trading on a DEX, they would sacrifice some capital for price slides. When they bought, they got fewer tokens because the price went up with their trade. When they sold, they also got fewer tokens because the price went down as they traded.
This is because the traditional Automated Market Maker (AMM), the technology that powered most DEX trades, has been crippled by its trade pricing mechanism. The AMM was great for price discovery, but it was terrible at providing deep liquidity, leaving traders with worse prices for their trades than they expected.
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The CLMM promised an end to this regime and LPs a superior method of providing liquidity. So, the concentrated liquidity seemed like a win-all situation for LPs who could maximize their profits and for traders who could make trades without losing capital.
The CLMM quickly failed to keep up the hype with LPs
It wasn’t long before LPs found that they were unable to efficiently allocate liquidity on a CLMM themselves and found themselves on the losing side of the system. After years of passively providing liquidity to AMMs, LPs were giddy with the constant need to rebalance positions or suffer a 100% volatile loss (IL).
Reports then surfaced that most LPs had lost money by providing full liquidity. To make matters worse, providing liquidity on a CLMM gave users an NFT as a deposit slip instead of a fungible LP token.
NFT reception spelled the end of DeFi composability as it is nearly impossible to deposit NFTs using other DeFi protocols. Without composability, concentrated liquidity positions cannot be used as collateral for a loan or as a reward in a yield farming program.
How Kamino helps familiarize users with CLMM Liquidity
CLMMs promised users many positive outcomes, but crowded out most users. DeFi typically stimulates participation from both sides of the smart contract — lenders for borrowers and LPs for traders — but the CLMM snubbed a lot of liquidity from LPs, which they found too difficult to leverage.
Kamino solves many of the problems that CLMMs brought to the DeFi community. First and foremost, Kamino introduced automated vaults that do all the hard work for LPs with concentrated liquidity, making the process more capital efficient than the standalone CLMM.
Users just need to deposit their tokens on Kamino and the vaults will help move positions to better areas to capture fees. Also, Kamino will automatically compound fees and rewards to increase a position’s balance, and users will receive an LP token known as a kToken as a receipt, which they can use as collateral for borrowing.
Kamino is incubated and ready to go by DeFi experts
With kTokens, LPs can earn fees from concentrated liquidity while borrowing USDH. USDH is the stablecoin of Hubble Protocol, the veteran Solana project team that Kamino created to fix what was wrong with the CLMM’s user experience.
Built on top of Orcas Whirlpools by some of Solana’s most experienced DeFi developers, Kamino is quickly becoming the interface many LPs choose to interact with a CLMM. At the time of writing, Kamino has gained $2 million in total locked value (TVL), which means there are many more tokens out there to help users make capital-efficient trades.
Providing concentrated liquidity has never been easier. As a result, LPs will be happy to earn fees from trading concentrated liquidity, and traders will be happy to have their transactions complete with more tokens in their wallets than if they were using a traditional AMM.
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