🦄 Uniswap V3 and Concentrated Liquidity: more opportunities, but more complexity

With the upcoming release of Uniswap v4, let’s talk more in depth about its predecessor Uniswap v3, and how concentrated liquidity has changed the way most users were doing liquidity providing.

Uniswap V3: A New Era of Decentralized Exchange

As you may know, Uniswap is one of the most popular decentralized exchanges (DEXs) in the world, allowing users to trade cryptocurrencies without the need for an intermediary. It mainly gathers 2 types of actors :

• Traders: People who use Uniswap to exchange assets through Uniswap’s liquidity pools.
• Liquidity providers: People who deposit their assets into Uniswap pools to allow others to trade them. In return, they earn fees from traders.

Uniswap V3, its last released version, has introduced new features to make it even more powerful and efficient, such as Concentrated Liquidity.

The key feature: Concentrated Liquidity

Uniswap V3 introduces the concept of Concentrated Liquidity. This allows liquidity providers to focus their liquidity within a specific price range.

When the cryptos you provided are in this specific price range, they will be used by traders and you will earn more transaction fees than you would earn if you had provided them full range. If they are outside of the price range, you won’t earn anything.

Concentrated liquidity brings a lot of benefits for both traders and liquidity providers :

• Improved capital efficiency: because liquidity providers can focus their liquidity within a specific price range.
• Better execution prices for traders: Traders are more likely to find liquidity at their desired price.

Concentrated liquidity: new opportunities for liquidity providers?

Concentrated liquidity seems to especially offer a lot of benefits to liquidity providers, including:

• ✅ Higher yields: by providing liquidity to concentrated liquidity pools.
• ✅ More flexibility: to manage their risk and return profile.

Unfortunately, it requires much more action from the liquidity providers, adding a lot of complexity, such as :

• ❌ Choosing a price range: Liquidity providers need to choose a price range within which they are willing to provide liquidity. This can be a difficult decision, as the price of an asset can move rapidly.
• ❌ Rebalancing positions: Liquidity providers need to rebalance their positions regularly to ensure that they are still profitable. This can be time-consuming and complex.
• ❌ Impermanent loss: Liquidity providers are exposed to the risk of impermanent loss, which is when the price of an asset moves outside of their chosen price range. This can lead to losses for the liquidity provider.

This creates a difference between experimented users, who master concentrated liquidity providing and are able to generate very interesting yields, and the others, who can see their benefits almost canceled by impermanent loss.

How to optimize Concentrated Liquidity yield?

To mitigate the risks of concentrated liquidity, liquidity providers should:

• 📚 Understand more in-depth concentrated liquidity: There are a number of resources available online, including blog posts, articles, and videos.
• ⏰ Rebalance their positions regularly: This way, they avoid being outside of range.

This can be very time-consuming, which is why most liquidity providers either lose money, earn very little, or simply don’t do it because of the complexity.

Lobster: Concentrated Liquidity, without effort

Lobster is a non-custodial DeFi application that provides users with a single-click solution to access complex DeFi strategies, including concentrated liquidity.

Our team has developed an autonomous algorithm that automates the process of concentrated liquidity provision, allowing users to earn higher yields and reduce their risk without having to worry about the complexity involved.

To use Lobster, you simply need to deposit your assets into the platform and choose a strategy. Lobster’s algorithm will then automatically manage the underlying positions, taking care of all the necessary tasks, such as rebalancing and risk mitigation.

Concentrated liquidity is one of the best ways to generate yield in DeFi, and we believe it should be accessible to everyone.

Try Lobster’s automated DeFi strategies →