Concentrated Liquidity
V3 introduces concentrated liquidity — LPs choose a specific price range[priceLower, priceUpper] in which to provide liquidity, rather than spreading it across the entire price spectrum (0 to infinity) as in V2.
The Core Idea
In V2, most liquidity sits idle. If ETH/USDC trades at 1 or $100,000 is never used. V3 solves this by letting LPs concentrate their capital where it matters.Capital Efficiency
A V3 LP providing liquidity in the range[$2,500, $3,500] achieves the same depth as a V2 LP with ~4.24x more capital. For tighter ranges, the multiplier is even higher.
| Range (relative to current price) | Efficiency vs V2 |
|---|---|
| Full range | 1x (same as V2) |
| ±50% | ~3.5x |
| ±10% | ~17x |
| ±1% | ~170x |
How It Works
Under the hood, V3 uses the samex * y = k formula, but applies it only within each LP’s chosen range using a virtual reserves model.
Within a position’s range:
Where L is the position’s liquidity — a measure of the depth the position provides.
Active vs Inactive Liquidity
- In-range: The current price is within the position’s range. The position earns fees.
- Out-of-range: The current price has moved outside the position’s range. The position holds only one token and earns no fees until the price re-enters.
- Upper bound crossed: The position becomes 100% token0 (no token1 remaining)
- Lower bound crossed: The position becomes 100% token1 (no token0 remaining)
Single-Sided Liquidity
You can create positions entirely above or below the current price:- Range above current price: Deposit only token0. Acts like a limit sell order.
- Range below current price: Deposit only token1. Acts like a limit buy order.
Trade-offs
| Advantage | Trade-off |
|---|---|
| Higher capital efficiency | Requires active management |
| Higher fee earnings per unit of capital | Risk of position going out of range |
| Limit-order-like behavior | More complex than V2 |
| Custom strategies per LP | Impermanent loss amplified in narrow ranges |