{"id":3053,"date":"2021-08-23T12:06:17","date_gmt":"2021-08-23T12:06:17","guid":{"rendered":"https:\/\/www.versacoin.org\/?p=3053"},"modified":"2021-08-26T15:03:06","modified_gmt":"2021-08-26T15:03:06","slug":"concentrated-liquidity-capital-efficiency-for-high-returns","status":"publish","type":"post","link":"https:\/\/www.versacoin.org\/concentrated-liquidity-capital-efficiency-for-high-returns\/","title":{"rendered":"Concentrated Liquidity: Capital Efficiency for High Returns"},"content":{"rendered":"\t\t
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I<\/span>f you are interested in passive earnings with cryptocurrencies, then liquidity mining is definitely worth your attention. A liquidity pool is a game-changing solution for decentralized exchanges to maintain liquidity by attracting community members’ funds. For that, the so-called liquidity providers receive a portion of rewards generated out of trading fees.<\/span><\/p> We will take a closer look at Uniswap<\/a> – one of the first DEXes that integrated an automated market-making solution. <\/span><\/p> Two years after the launch, the project implemented liquidity pools in Uniswap V2. This resulted in drastic DEX<\/a> growth not only in utilization but also in the number of projects built on top of it, such as PancakeSwap<\/a> and SushiSwap<\/a>. <\/span><\/p> On May 5, 2021, the Uniswap team released the third version of its DEX planned to be realized on Optimism’s layer-2 solution<\/a>. Notably, the combined daily trading volume on Uniswap V2 and V3 surpassed 1,1 Bn in USD value (as of 22 August 2021).<\/span><\/p> <\/p> What interests us the most is a new concept called concentrated liquidity<\/a>. This feature not only provides liquidity providers (LPs) with more options but also enables capital efficiency gains up to 4000x over the existing protocol.<\/span><\/p> On Uniswap V2, LPs technically provide liquidity over the entire range of assets’ possible prices. However, some coins are only traded within a small liquidity window, such as $0.999 and $1.001 for USDT\/DAI pair. Thus, liquidity outside this price range is ineffective and, what’s more important, the pool’s participants bear a higher risk of slippage or impermanent loss<\/a> (see the chart below).<\/span><\/p> <\/p> To increase capital efficiency, Uniswap V3 allows liquidity providers to set “price ranges”. It allows the pool to provide more liquidity around actual likely prices preferred by traders. Since LPs receive rewards only when the capital is used, it allows them to maximize return.<\/span><\/p> <\/p> Let’s compare the potential income from liquidity provision on Uniswap V2 and V3.<\/span><\/p>Why does concentrated liquidity mean higher returns?<\/span><\/h2>
So how much can I earn with Uniswap V3?<\/span><\/h2>