How a DLMM works
No crypto experience needed. We explain the ideas in plain language.
DLMM = Dynamic Liquidity Market Maker.
In this guide: What's a market?, liquidity, the bin way, who does what?
What's a market?
A market is where buyers and sellers meet. Buyers want to pay as little as possible; sellers want to get as much as possible. When they agree on a price, a trade happens. The "market price" is the price at which people are trading right now.
What's a market maker?
A market maker is someone (or a program) that is always ready to buy or sell. Instead of waiting for another person to show up, you trade with the market maker. For that, the market maker earns a small fee on each trade.
What's liquidity?
Liquidity is the "pool" of tokens available to trade. Think of it like a vending machine: it holds both snacks and change. When you put in money, you get a snack. In a trading pool, when you put in Token A, you get Token B (and pay a small fee). The more tokens in the pool, the more liquidity, and the easier it is to trade without moving the price too much.
Pool = vending machine
The old way vs the bin way
The old way (one curve)
In a simple automated market, liquidity is spread across a single curve for all possible prices. That can work, but your capital is spread thin. Some of it sits at prices that rarely get hit, so it earns less.
Takeaway: your money is spread across every price, so some of it rarely gets used.
The bin way (DLMM)
In a DLMM, liquidity is placed in separate bins, like price steps. Each bin has a fixed price. Only the bin at the current market price is "active." When the price moves, the active bin moves to the next one. You choose which bins to fill, so you can concentrate your tokens where trading actually happens.
Think of it like a vending machine with separate slots for different prices: you choose which slots to put your tokens in. Only the slot at the current price is used for trades, so you can concentrate your money where it actually gets used.
Takeaway: you choose exactly which price steps your money sits in, instead of spreading it everywhere.
Why "dynamic"?
As the market price moves, the active bin moves with it. Liquidity stays concentrated where it's needed, right around the current price. Traders can often get better prices (less slippage: the difference between the price you expect and the price you get), and people who provide liquidity can choose which price range (which bins) to support and earn fees from.
Before: active bin at $1.00
After: price moved to $1.01
Who does what?
Liquidity providers
You add both kinds of tokens (e.g. Token A and Token B) to the pool and choose which price bins to fill. When someone else swaps, the pool uses the tokens in those bins. You earn a share of the trading fees. You're stocking the shelves so others can trade.
Traders
You want to swap one token for another. You send in Token A and get Token B (or the other way around). You pay a small fee on the trade. That fee is shared with the people who provided the liquidity in the bins you used.
Where the fee goes (to liquidity providers, or LPs)
Worked example
Scenario: Alice adds $100 of Token A and $100 of Token B to the bin at $1.00. Bob swaps $500 of Token A for Token B.
- Alice's liquidity sits in the $1.00 bin.
- Bob's swap uses that bin.
- Fee = 0.5% of $500 = $2.50.
- Alice earns her share of the $2.50 (e.g. proportional to her share of liquidity in that bin). If she's the only LP in that bin, she gets the full $2.50.
From swap to your share
In one sentence
A DLMM is like a vending machine: you and others stock the shelves (bins) at different prices. When someone swaps, the machine uses the right shelf and you earn a bit of the fee.
Vending machine = DLMM
Next: Trade and earn with a DLMM.