Uniswap with its new version tries to revolutionize DeFi, since its throne has been questioned by the Binance Smart Chain and by the innovations introduced by PancakeSwap.
One of the novelties of Uniswap V3 is the concept of "concentrated liquidity".
In V2 we as liquidity provider (LP) put a pair of tokens (ETH / Dai, ETH / WETH, USDC / Dai, etc) receiving in exchange fees (for providing liquidity). However, this was not an optimized performance. Let's think about the variation range of two stablecoins:
USDC / Dai: The price range is approximately 0.99 $ -1.01 $
With V2 I could not set my price range and managed to exploit only 0.50% of my capital. For example if my capital (LP) was $ 20,000 I would have put: $ 10,000 on USDC and $ 10,000 on Dai (my price range was from $ 0 to infinity: liquidity spread across the full price).
Instead with V3 I will be able to set an interval by concentrating all my capital in that price range. What does this entail? I will have a higher profit because the performance is optimized.
As you can see in the photo below, this novelty, in addition to improving the yield, also allows you to use less capital!
What changes substantially? First of all I have to choose my pairs (liquidity) and set the fee I will earn.
1) If I use two stable I will set 0.05% fee
2) If I use a volatile token and a stable I will set 0.3% (same fee as V2)
3) If I use two volatile tokens ("exotic"), I will set 1% (because the "impermanent loss" risk will be greater)
The other parameter that I have to add is precisely the price range in which the two tokens will oscillate (in V2 it went from 0 to infinity). I read a price ratio between the two tokens provided (for example with two stable it will be 1: 1).
The price range should NOT be placed randomly! The current price must be within the range, otherwise I will NOT earn fees.
Are you interested in ways to earn crypto bonus? Check it out here: Some Sites To Earn Crypto Bonus (Old & New)