Concentrated Liquidity (Uniswap)
Uniswap concentrated liquidity is a feature of Uniswap V3 that allows liquidity providers to allocate capital within specific price ranges of a token pair, increasing capital efficiency and potential returns compared to traditional AMM models.
What is Concentrated Liquidity (Uniswap)?
Introduced in 2021 with Uniswap V3, concentrated liquidity enables liquidity providers (LPs) on the decentralized exchange (DEX) to specify custom price ranges for their deposited assets in a liquidity pool, rather than providing liquidity across the entire price curve (0 to infinity) as in Uniswap V2. This innovation, built on Ethereum and layer-2 solutions like Arbitrum, uses a constant product formula (x * y = k) but divides liquidity into discrete price “ticks” (e.g., 0.01% increments), allowing LPs to concentrate funds where trading is most active. As of September 2025, Uniswap V3 holds over $4 billion in total value locked (TVL), with concentrated liquidity driving 70% of its $1 trillion annual trading volume, per DeFiLlama data. LPs earn higher fees (0.05%, 0.3%, or 1% per trade) proportional to their share of active liquidity but face increased impermanent loss risk within narrow ranges.
For example, in an ETH/USDC pool, an LP might deposit 1 ETH ($3,000) and 3,000 USDC into a range of $2,800-$3,200, earning 10-20% APY if ETH trades within this band, compared to 5-10% in V2’s broader pools. If ETH’s price moves outside this range, the position becomes inactive, earning no fees but reducing impermanent loss compared to holding unpooled assets. In a high-volume pool like USDC/USDT, an LP concentrating $10,000 at a 0.05% fee tier might earn $500 monthly at 60% pool utilization, per Uniswap analytics. However, a 2023 exploit in a V3-compatible protocol drained $15 million due to a tick manipulation bug, highlighting smart contract risks. LPs must also monitor gas fees ($2-$10 on Ethereum, $0.10-$1 on Arbitrum) and rebalance ranges to stay active, making concentrated liquidity ideal for active management in DeFi’s $75 billion ecosystem.
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