. After Uniswap v3’s introduction of concentrated liquidity in 2021, it quickly gained market share among DEXes. Compared to infinite price range liquidity provision, concentrated liquidity can be much more capital efficient. However, the flipside is an increasing risk of impermanent loss for liquidity providers.
Concentrated liquidity providers are given more degrees of freedom to set their pool position. This leads to several different strategy setups, some of which may be better confined to sophisticated investors, or active liquidity management protocols. That seems to apply, for example, to liquidity provision of volatile token pairs, which may require frequent rebalancing to be profitable.
Empirical results for concentrated liquidity provision are so far rather disappointing. In most studies it does not consistently outperform simple buy and hold strategies. This is mainly driven by impermanent loss. One possible exception are token pairs, which feature low risk of impermanent loss, such as stablecoins.
© 2022 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
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