The Fan Token® ecosystem offers supporters a way to engage with their favorite sports teams, be it voting on the music that blasts when they walk onto the pitch or participating in a virtual meet-and-greet.
But it’s not all about getting closer to the starting XI. For a Fan Token digital asset to be purchasable, it needs to have a price – something which holds true of all goods, be they physical or digital. And determining that price falls to thousands of Fan Token holders, whose trading activity helps to determine the fair market value for the digital asset at any given point in time.
Which brings us to Solana, a blockchain that’s particularly suited to SportFi including the use of Fan Tokens in a multitude of ways, from holding in wallets to transferring between users and trading on decentralized exchanges.
In this guide, we’ll explain what core Solana technologies including DEXs, liquidity pools, and DLMMs do, how they fit together, and what you need to know before using them, whether you’re a SportFi fan or a general token trader.
Getting to know Solana
First, a tl;dr on the blockchain that makes all of this possible. Solana is a Layer 1 network that supports smart contracts – programs that execute automatically when certain conditions are met. These allow developers to build everything from blockchain games to decentralized exchanges.
What distinguishes Solana from other Layer 1s is its emphasis on speed and affordability. Transactions typically settle in seconds, while network fees are generally a fraction of a cent. That’s useful when you’re trading digital assets, since nobody wants to pay several dollars in fees every time they swap one token for another.
Solana’s native cryptocurrency is SOL, which is used to pay network transaction fees. Even if you’re only interested in trading Fan Token digital assets, you’ll generally need a small amount of SOL in your wallet to cover these costs.
It starts with a Solana wallet
Before you can start exploring Solana, you’ll need a wallet that supports the network. Popular options include Phantom, Solflare, and Jupiter, all of which are available as browser extensions and mobile apps. Unlike a traditional bank account, a self-custodial wallet such as the aforementioned options puts you in control of your assets. There’s no bank or exchange holding your tokens on your behalf.
Technically, your tokens aren’t stored inside the wallet. They exist on the blockchain, while your wallet manages the cryptographic keys that allow you to access and transfer them. To be more precise, the wallet is a digital keyring that provides access to your blockchain assets. But from a user perspective, the tokens live to all intents and purposes inside your wallet and only leave it with your say-so.
When you create a non-custodial wallet, you’re given a private key, often represented as a recovery phrase consisting of a series of words. Keep it somewhere secure, never share it, and don’t enter it into websites or applications claiming to offer technical support. Once your wallet’s set up, you can use it to receive compatible tokens, check your balances, and connect to decentralized applications.
Decentralized applications such as exchanges where you can trade tokens. Which brings us to DEXs…
Next you need a DEX
Instead of depositing your digital assets with an exchange operator, as is the case with a centralized platform, a decentralized exchange – or DEX – requires you to connect your own wallet and trade directly through smart contracts.
This means you retain control of your assets until you authorize a transaction. There’s no need to transfer your assets, be it stablecoins, protocol tokens, or FAN TOKEN® into an exchange account before trading them.
Solana has a well-established DEX ecosystem, with protocols such as Raydium and Orca enabling users to swap tokens through liquidity pools. There’s also Jupiter, a DEX aggregator that searches different liquidity sources to find suitable trading routes. Rather than operating like a conventional exchange, it helps users access liquidity distributed across Solana’s decentralized trading ecosystem.
Where does Meteora fit in?
If we’re going to talk about liquidity, we need to speak about Meteora, the leading decentralized liquidity protocol built on Solana. Meteora provides infrastructure that allows tokens to be traded through liquidity pools. These pools contain assets made available for trading by liquidity providers, allowing buyers and sellers to exchange tokens without needing to find someone willing to take the opposite side of their trade.
Imagine a currency exchange booth that already holds supplies of pounds and euros. You can walk up and exchange one for the other without waiting for another customer who happens to want the reverse transaction. Liquidity pools perform much the same function, except they’re governed by smart contracts rather than operated by a cashier.
Meteora supports several types of liquidity pools, with the best known being its Dynamic Liquidity Market Maker (DLMM). This is where things get particularly interesting, since DLMMs offer a flexible mechanism for trading newly launched assets and allowing their market prices to develop through supply and demand.
DLMMs: A smarter way to manage liquidity
DLMM stands for Dynamic Liquidity Market Maker and is a type of automated market maker, or AMM, that organizes liquidity into individual price ranges called bins.
Liquidity providers can choose where to position their assets and when someone buys tokens, their trade draws upon the liquidity available at the current price. If buying demand exhausts the available tokens in one bin, trading can progress to the next, higher-priced bin. Selling pressure can move trading in the opposite direction.
Price discovery works the same way on centralized exchanges: prices are determined by market supply and demand (buyers and sellers), not by the exchange operator. The exchange simply provides the matching engine to execute trades.
Meteora’s DLMM also supports dynamic trading fees, which can adjust according to market volatility. For users, the main thing to understand is that a DLMM provides the underlying machinery for token swaps.
But understanding the basics will help you make sense of the prices you’re quoted and why they can change.
Four pieces of the same puzzle
There’s a lot of terminology to absorb when you first encounter decentralized trading on Solana, but the relationship between the different components is relatively straightforward.
Solana provides the blockchain on which transactions take place. Your wallet gives you control over your assets and allows you to authorize transactions. DEXs provide the interfaces and smart contracts through which tokens can be exchanged. And liquidity protocols such as Meteora, using mechanisms including DLMMs, make assets available for trading at different prices.
Each serves a distinct purpose, but together they create an ecosystem in which digital assets can be exchanged without relying on a traditional centralized intermediary. Which makes them four pieces of the same puzzle and the key to trading on Solana while keeping control of your assets at all times.
