A derivative of the XYK constant product model, Continuous Liquidity Pools (CLP) is a primitive pioneered by THORChain. In terms of the core mechanics, THORChain’s CLPs are identical to Uniswap v1/v2. But CLPs introduce a much more friendly fee model for LPs. Instead of a fixed fee like Uniswap v1/v2, CLPs use slip-based fees which increase and decrease per a trade’s slippage.
Slip-based fees allow LPs to earn according to demand for their liquidity. When slippage for a given trade is low, it means the compositions of an LPs holding remain stable. High slippage trades meaningfully move an LPs asset composition and increase impermanent loss. By incorporating slippage into the fee model, CLPs offer LPs have much better impermanent loss protection. LPs in low liquidity pools with high trading demand will be able to make a greater yield on fees, which in turn incentivizes more liquidity to the pool.
Fundamentally, the fee model is the only difference between a traditional constant product AMM and CLP-based AMMs. But this change breeds several other benefits. For a deeper understanding of this model and its implications read our reports on Thorchain.
