Raydium: what it is and how it works

What is Raydium and how does it work? We answer this and other key questions about Solana’s most popular DEX.

Let’s explore what Raydium is and how it operates. Raydium is one of the key players in the expansive Solana ecosystem. In this article, we will begin by providing a straightforward explanation of how this decentralised exchange (DEX) functions, specifically focusing on its automated market maker (AMM) technology. Following that, we’ll delve into the context of its creation, and finally, we’ll focus on the RAY token. So, let’s address the question right away: What is Raydium, and how does it work?

Raydium: what is it, and how does it work?

Solana is gaining traction in the competition with Ethereum to become the most popular blockchain. One of the standout protocols supporting this network, founded by Anatoly Yakovenko, is Raydium, which is currently the most widely used decentralised exchange (DEX) in the DeFi space.

Raydium is a decentralised exchange with an automated market maker (AMM) system. Its key features include low transaction costs and fast processing times. On the platform, users can exchange tokens, provide liquidity, and participate in yield farming, all while benefiting from several unique characteristics.

One of Raydium’s notable advantages is its integration with OpenBook, a decentralised order book on Solana, which enhances users’ liquidity access.

The structure of Raydium

To understand Raydium and how it operates, we can examine the key components and activities that set it apart from its competitors, both within the Solana network and across other blockchains.

Raydium enables users to exchange tokens, allowing them to buy and sell digital assets. To use this decentralised exchange, you need a decentralised wallet that supports tokens created with the Solana Program Library (SPL) standard, which is the only type compatible with Raydium. A popular example of such a wallet is Phantom, the most widely used option in the Solana ecosystem.

Thanks to Solana’s speed and scalability, token exchanges on Raydium occur within seconds, and transaction costs are significantly lower than those on Ethereum. Exchanging a token on Raydium is straightforward: simply connect your wallet, select or paste the address of the token you wish to exchange, enter the desired quantity, and click “Swap.” If the transaction is confirmed, the swap will be completed in just a few seconds!

The main issue with several centralised exchanges is their inability to support limit orders. To address this problem, Raydium integrated its Automated Market Maker (AMM) with OpenBook, which is an open-source fork of Serum version 3, another decentralised exchange (DEX) on the Solana blockchain.

This integration provides users with access to a larger pool of liquidity and, more importantly, allows for the use of limit orders, offering greater flexibility in trading operations. In other words, by utilising OpenBook, Raydium effectively combines the advantages of decentralised exchanges with certain features of centralised ones by linking its AMM with an innovative order book system.

In any decentralised exchange (DEX) that uses an Automated Market Maker (AMM), users can deposit pairs of tokens into liquidity pools and earn rewards in RAY tokens from transactions conducted by other users. Liquidity pools are fundamental to the operation of popular decentralised exchanges, as they enable direct trading without the need for intermediaries.

On Raydium, users can choose between two types of liquidity pools: Raydium Pools and Permissionless Pools. Raydium Pools are the protocol’s official pools, while Permissionless Pools are created by community members and allow anyone to add new ones.

Regarding returns, the annual yields displayed to users are based on the swaps conducted on this DEX. For each transaction, Raydium adds a 0.25% fee to the total amount. Of this fee, 0.22% is allocated to the liquidity pool as rewards for liquidity providers, while the remaining 0.03% is distributed to RAY stakers as their rewards.

Yield farming is also available on Raydium, allowing users to stake Liquidity Provider (LP) tokens to earn additional rewards. Raydium’s farms are categorised into two types: Raydium and Fusion.

The Raydium farms consist of a combination of RAY with another token, rewarding users who deposit LP tokens with RAY tokens. In contrast, Fusion farms feature a variety of tokens for both deposits and rewards.

How Raydium works: the evolution of the project

Launched in 2021, Raydium was created to overcome the scalability and cost limitations of other blockchains. Its choice of Solana as its core infrastructure was driven by Solana’s capability to process over 65,000 transactions per second at minimal cost, making it ideal for an automated market maker (AMM) protocol that handles large volumes of trades and liquidity.

Initially, Raydium integrated its liquidity with Serum’s order book. However, due to concerns about Serum’s long-term viability, Raydium ceased sharing liquidity with its order book and instead integrated its AMM with OpenBook, a fork of Serum V3.

Token RAY and Governance

To fully understand Raydium and its operations, it is essential to examine its utility token, RAY, which plays a central role within the platform. Users who provide liquidity to pools or participate in farming can earn RAY rewards. Additionally, RAY token holders have the opportunity to participate in the protocol’s governance, allowing them to influence the team’s or the community’s proposals for improvements.

By staking RAY tokens, users can earn further rewards and gain access to advanced features. The token distribution strategy is designed to promote sustainable growth for the protocol, with a significant portion allocated for development, marketing, and community rewards. Raydium was launched in February 2021 with a maximum supply of 555 million tokens; as of now, there are 290 million RAY tokens in circulation.

In summary, Raydium is more than just a decentralised exchange with an automated market maker (AMM). It serves as the nerve centre of the Solana ecosystem and is an advanced decentralised application (dapp) that is continuously updated. To support this claim, one can examine its performance from the beginning of 2023, during which it has recorded a total trading volume of more than USD 200 billion, outperforming its competitors.