Uniswap v3: New Horizons
Uniswap V3 is unlocking greater capital efficiency for liquidity providers and better pricing for traders. It does so through a new primitive described as “concentrated liquidity”. With Uniswap V2, the liquidity added by LPs was maintained in a 50-50 ratio by the protocol’s market making equation (XYK, or constant product market maker). The XYK price curve provides inventory from just above $0, to just below infinity. As a result, liquidity density was low and LP fees weren’t too impressive either (though still attractive). Since it’s highly unlikely that the price of ETH would either go to $10 or soar towards infinity in a brief amount of time, providing liquidity at these extremes can be considered a waste.
The concentrated liquidity enabled by V3 improves upon this by allowing LPs to set custom ranges. For example, let’s say there is an LP who thinks ETH won’t go above $5k or below $2k. With UniV3, they can now pr