Project Overview

Raydium, a decentralized exchange (DEX) on Solana, utilizes an automated market maker (AMM) system. In its early days, it provided liquidity for various tokens in the Solana ecosystem by integrating with Serum’s order book system (now called Openbook) and establishing permissionless liquidity pools. This approach allows for a more flexible and seamless trading experience for users. Currently, Raydium has discontinued its order book feature and offers three types of liquidity pools, each with its own fee structure, as shown in the table below:

Fee structure for different liquidity pools on Raydium, Source: Radyium: King of Solana DeFi

• Standard AMM Pool (AMM v4)
  This is the original hybrid AMM model, which operates similarly to Uniswap v2 using the formula k = x*y (where k is a fixed value and x and y are the prices of the two tokens in the liquidity pool). The price range covered by this pool extends from 0 to infinity. To create this pool, users need to spend 0.4 SOL to set up a market ID on Openbook, and the idle funds in the liquidity pool initially help provide liquidity to Openbook’s order book.

• Constant Product Market Maker (CPMM)
  Launched in Raydium v3, CPMM operates like AMM v4 but with a key difference: AMM v4 has a fixed trading fee of 0.25%, while CPMM allows for four different fee levels: 4%, 2%, 1%, and 0.25%. Additionally, there is no need to create an ID on Openbook when setting up a CPMM, making it a more cost-effective option, and it supports Solana’s latest token standard, Token-2022.

• Concentrated Liquidity Market Maker (CLMM)
  This variation of CPMM enables liquidity providers to offer liquidity within specific price ranges rather than covering the entire price spectrum, resulting in improved capital efficiency. Earlier this year, Raydium collaborated with pump.fun to automatically create liquidity pools for meme coins that reached a market cap of 69k, leading to a significant increase in Raydium’s trading volume, which now makes up 97% of the total trading activity in the Solana ecosystem.

Earlier this year, Raydium teamed up with pump.fun to automatically create liquidity pools for meme coins that reached a market cap of 69k. This collaboration significantly boosted Raydium’s trading volume, representing 97% of the total trading activity in the Solana ecosystem.

Team Background

Raydium is led by an anonymous team headed by AlphaRay. The team originally specialized in algorithmic trading for commodities. In 2017, they transitioned to the cryptocurrency market-making space. After exploring DeFi in 2020, they identified the need for order book AMMs to aggregate liquidity, which led them to form a core team with strong trading backgrounds to develop Raydium. This team oversees overall strategy, operations, product direction, and business development.

Other team members use “Ray” as a suffix in their names, including XRay, the Technical Director and Head of Development, who has 8 years of experience in trading and designing low-latency systems in both traditional and crypto markets; GammaRay, the Marketing Head, who previously worked at a leading data analytics and market research firm, focusing on boosting customer engagement; and StingRay, the core developer of the order book AMM, who has extensive experience in operating systems and trading system development from his previous role in an autonomous driving systems company.

Overall, the Raydium team brings a wealth of experience in market making, arbitrage, and high-frequency trading from both traditional and cryptocurrency markets. Their diverse expertise in algorithmic trading, marketing, trading systems, smart contract development, and mathematics is vital for Raydium’s growth and innovation.

Funding Situation

According to Raydium’s official information, 6% of the tokens were allocated to early investors, but the team has not disclosed specific details about their funding situation.

History of Raydium

Early Days

Raydium launched in 2021 with a hybrid AMM model. The idle funds in its liquidity pools would automatically place orders in Serum’s order book system to maintain adequate liquidity. This allowed users to swap tokens directly with the AMM pools or place limit orders on Serum for more flexible trading options. This design enabled users to easily switch between their preferred trading methods using AMM and the order book, taking advantage of Solana’s high throughput and low transaction costs for a faster and more affordable decentralized trading experience. Raydium was the first hybrid AMM in DeFi to support order book functionality.

In addition to the liquidity pools created by the team, Raydium also introduced permissionless pools, enabling anyone to create liquidity pools for various SPL tokens while customizing parameters like initial price, trading fees, and initial liquidity. This innovation promotes a more diverse trading environment and market configuration, providing additional liquidity support for tokens in the Solana ecosystem and expanding Raydium’s application scope. These advancements have helped Raydium stand out from other products and achieve initial success early on.

Mid-Stage

After the collapse of FTX, Serum forked into Openbook, and Raydium moved its liquidity pools there. In 2023, a surge in meme coins took off on Solana, rapidly increasing the number of pools on Raydium. However, the existing infrastructure was insufficient to handle the significant uptick in activity, especially since meme coins fall into a long-tail market where their high volatility does not fit well with Openbook’s order book system. To provide enough liquidity for meme coins in the order book, a large number of orders need to be set up ahead of time across a wide price range. Unfortunately, predicting the final trading price of meme coins is nearly impossible, making it challenging for Raydium’s AMM to operate effectively on Openbook. Furthermore, Raydium’s AMM was originally designed to accommodate tokens with up to five or six decimal places, while meme coins often have prices with many more decimal places, which can create confusion and strain on the system. (*Long-tail market: This refers to a market with many niche demands, where each product may not have a high demand individually, but collectively, their demand can rival that of popular products. In this context, while individual meme coins may not have the same demand as popular tokens like BTC, ETH, or SOL, the overall demand for the meme coin market can still compete with them.)

Recognizing that the product’s use case had outgrown its original scope, Raydium stopped sharing liquidity with Openbook and launched Raydium V3. This version improved the user interface and lowered the costs for users to create pools, resulting in a quicker and smoother trading experience.

Recent Developments

In January 2024, the meme coin launchpad platform pump.fun was launched, partnering with Raydium. Users can now launch meme coins for just 0.02 SOL. Once the token’s market cap hits $69k, a liquidity pool is automatically created on Raydium, depositing $12k in initial liquidity and burning the tokens. The ease and low cost of the token launch process on pump.fun, combined with a fair launch mechanism that helps prevent token teams from disappearing, quickly attracted many participants, significantly increasing Raydium’s trading volume. We will discuss the impact of pump.fun on Raydium in more detail in later sections.

Token Economics

Distribution of RAY tokens, Source: Raydium Docs

Raydium’s native token, RAY, was launched during the TGE in 2021. The figure above illustrates the token distribution, with a total supply of 555,000,000. Of this, 34% is reserved for mining, 30% for ecosystem development, 20% for the team, and 8% for liquidity, with the remainder distributed to the community, investors, and advisors. The team and investors’ shares (25.9% of the total) are fully locked for the first 12 months after the TGE and will be released gradually over the next 13-36 months. The team also plans to allocate 12% of fee income for RAY buybacks.

RAY holders can participate in governance voting for Raydium and earn additional RAY through staking, with the current annual percentage rate (APR) at 4.45%. Initially, holding a certain amount of RAY allowed participation in Raydium’s Launchpad program, Acceleraytor, which provides opportunities to join IDOs. Although the Acceleraytor program has been discontinued, and the team has stated it will not be relaunched, there may be future opportunities for RAY holders.

According to Coinmarket data, as of the time of writing, the circulating supply of RAY is 263,850,025, with a circulation rate of 47.5%. The current price is $4.20, giving it a market capitalization of $1.35 billion. The highest price recorded was $16.93 on September 13, 2021, while the lowest was $0.13 on December 30, 2022.

Development Overview

Raydium was launched in 2021 and has been evolving for over three years now. In this section, we will examine Raydium’s current development status through data, its role in the Solana ecosystem, and the benefits of its partnership with pump.fun.

Raydium’s Role in the Solana Ecosystem

Total Value Locked (TVL) of various public chains as a percentage of the overall market, Source: DefiLlama

Solana has emerged as the fastest-growing public chain over the past year, with its TVL skyrocketing from $427 million in November last year to $6.7 billion at the time of writing. This accounts for 7.04% of the entire crypto market, ranking just behind Ethereum (55.95%) and Tron (7.09%). Among the top five public chains by TVL, Solana also leads in key metrics such as daily active addresses, daily trading volume, and DEX trading volume.

Daily active addresses, daily trading volume, and DEX trading volume of the top five public chains by TVL, Source: Artemis

The increase in Solana’s users and trading volume can largely be attributed to the meme coin frenzy that began last year with WIF and BONK. The launch of pump.fun further provided meme coin enthusiasts with a more convenient and secure trading environment, along with low trading costs and high transactions per second (TPS). This has made Solana the preferred playground for meme coin traders, contributing to the growth of the entire ecosystem. Raydium has also benefited from its collaboration with pump.fun, surpassing Orca to become the largest DEX on Solana, holding 61% of the market share.

Market share of Solana DEXs, Source: Dune

Raydium’s permissionless pools allow anyone to create liquidity pools, offering both Constant Product Market Maker (CPMM) and Constant Mean Market Maker (CLMM) models, along with various fee tiers to cater to different token types. This enhances value discovery and has attracted many projects and users to deploy their pools on Raydium, with its aggregated liquidity reaching 68% of the market.

Strong liquidity indicates adequate trading depth, improved capital efficiency, and reduced trading slippage and costs. This, in turn, attracts more users and capital, further enhancing liquidity and creating a positive feedback loop. The next figures illustrate that Raydium significantly outperforms other DEXs in daily trading volume and active addresses, underscoring its importance in the Solana ecosystem.

Daily trading volume and TVL over the past 90 days for Solana DEXs, Source: Dune

Daily active addresses for Solana DEXs, Source: Artemis

Raydium’s Trading Composition

As seen in the figure above, prior to 2024, most trading on Solana took place on Orca. However, starting in 2024, Raydium’s market share began to grow significantly, and there’s a clear increase in trading volume on Raydium compared to earlier periods.

Monthly trading volume on Raydium, Source: Raydium Analytics

Among the tokens traded on Raydium, native tokens are the most common. However, since January, there has been a noticeable increase in the trading volume of meme coins, largely due to the influence of pump.fun. Under the mechanics of pump.fun, any meme coin that reaches a market cap of $69k will automatically have a liquidity pool created on Raydium, with $12k set aside as initial liquidity. This means that as long as a meme coin coming from pump.fun gains some traction, Raydium can automatically benefit from the trading volume it generates.

Proportions of token types traded on Raydium, Source: Raydium Analytics

Despite this, pump.fun, as the initial launch platform, only accounts for 5.2% of the total trading volume, a significant gap compared to Raydium’s 61%. Logically, the variety and number of meme coins traded on pump.fun should exceed those on Raydium, especially since the increase in Solana’s trading volume has been driven by this meme coin craze. So why is there such a difference in trading volumes? There are two main reasons:

1.Meme Coins Transitioning to Raydium Are More Popular

Comparison of trading volumes for meme coins launched on pump.fun between pump.fun and Raydium, Source: Dune

Nearly 85% of the trading volume for meme coins launched on pump.fun occurs on Raydium, while pump.fun only accounts for 15%. This is because the meme coins that successfully transition from pump.fun to Raydium have a market cap of at least $69k, indicating their popularity and resonance within the community. This filtering process allows them to establish their liquidity pools on Raydium. By this stage, the meme coins available for trading on Raydium are typically not low-quality coins; although they may still be small in market cap and have risks of manipulation, most of the remaining tokens possess a certain level of narrative strength.

List of popular meme coins, Source: GMGN

On Raydium, the capital volume and user count are significantly higher than on pump.fun, leading to a larger market and, consequently, higher trading amounts. As shown in the GMGN panel, the trading volume for popular meme coins can reach millions of dollars quickly. Meme coins with strong narratives and solid community support can even achieve higher market caps, such as POPCAT ($1.5B), GOAT ($746M), and MOONDENG ($218M).

Thus, while the number of meme coins that can transition to Raydium is limited, the larger market size and the ability of a few standout meme coins to attract many traders lead to Raydium having a significantly higher trading volume for these native meme coins compared to pump.fun.

2.Meme Coins Are Not the Main Drivers of Raydium’s Trading Volume

While meme coins offer the potential for impressive returns, they have attracted a significant influx of new users and capital into the Solana ecosystem, contributing to its overall growth—not just within the meme coin niche. Notably, Jito, the leading liquidity staking protocol on Solana, provided substantial airdrops to its loyal users last year. Consequently, many individuals engaging with meme coins also began exploring other Solana ecosystem projects that had yet to launch tokens, such as Marginfi, Kamino, Magic Eden, and Backpack.

Monthly trading volume of various token types on Raydium, Source: Raydium Analytics

These activities generate an increased demand for token exchanges, particularly for SOL, Solana’s native token. The proportion of native token trading is continuously rising. This indicates that Raydium benefits more from the overall success of the Solana ecosystem than from the trading volume generated by meme coins alone.

Raydium’s Revenue

Fees collected by Raydium, Source: Raydium Analytics

Raydium’s treasury balance, Source: Raydium Analytics

Number of RAY tokens repurchased, Source: Raydium Analytics

As of November 7, Raydium has collected $95 million in fees, with a treasury balance of $2.5 million, marking a 55-fold increase over the past year. Additionally, the number of RAY tokens repurchased has reached 40 million, valued at approximately $200 million.

Conclusion

Raydium has leveraged the meme coin frenzy to reach new heights following the last DeFi Summer, establishing itself as a crucial liquidity provider within the Solana ecosystem. As emerging projects on Solana, such as DePin, PayFi, and chain abstraction, continue to develop, Raydium’s position is expected to solidify further. It has the potential to grow into a massive DeFi protocol akin to Uniswap, making its future developments worthy of continued attention.