Uniswap V3 transformed liquidity providing from passive income to active position management. With concentrated liquidity, LPs can achieve up to 4000x capital efficiency—but with greater complexity and risk. This deep dive explains everything you need to know.
The Problem V3 Solves
In Uniswap V2, liquidity was distributed across all possible prices—from $0 to infinity. This meant:
- Massive capital inefficiency — Only ~0.5% of liquidity was actively used
- Lower returns — Fees spread across unused price ranges
- No competitive advantage — Everyone earned the same rate
How Concentrated Liquidity Works
The Tick System
V3 divides the price curve into discrete ticks. Each tick represents a 0.01% price movement.
Capital Efficiency Math
| Price Range | Capital Efficiency vs V2 | Risk Level |
|---|---|---|
| $1,000 – $5,000 (5x) | ~4x | Low |
| $1,800 – $2,200 (1.22x) | ~22x | Medium |
| $1,950 – $2,050 (1.05x) | ~100x | High |
Fee Tiers Explained
V3 introduced multiple fee tiers to match different trading pair characteristics:
- 0.01% — Stablecoin pairs (USDC/USDT)
- 0.05% — Stable pairs (WETH/stETH)
- 0.30% — Standard pairs (ETH/USDC) – Most common
- 1.00% — Exotic pairs (Low liquidity tokens)
NFT Position Tokens
Unlike V2’s fungible LP tokens, V3 positions are represented as NFTs because each position has unique parameters (range, tokens, fee tier).
Position States: In Range vs Out of Range
Liquidity Providing Strategies
Strategy 1: Wide Range (Passive)
Range: ±30-50% from current price. Set and forget with 2-4x efficiency vs V2.
Strategy 2: Medium Range (Semi-Active)
Range: ±10-20% from current price. Weekly rebalancing with 10-20x efficiency.
Strategy 3: Tight Range (Active)
Range: ±2-5% from current price. Daily or automated management with 50-100x+ efficiency.
Key Takeaways
- V3 allows LPs to concentrate liquidity in custom price ranges
- Tighter ranges = higher capital efficiency but more active management
- Positions are NFTs with unique parameters
- Four fee tiers: 0.01%, 0.05%, 0.3%, 1%
- Impermanent loss is amplified compared to V2
- Choose strategy based on your time, skill, and risk tolerance