DEX protocols shift toward concentrated liquidity, bet on Uniswap

DEX protocols have become an essential aspect of the decentralized finance (DeFi) ecosystem, where liquidity and liquidity providers play a critical role in keeping the rapidly expanding market moving.

DEX see a shift toward concentrated liquidity

On the one hand, when DEX protocols are witnessing daily trade volumes in the billions, the liquidity market is gradually shifting away from traditional liquidity mechanisms and toward concentrated liquidity. Previously, liquidity was spread equally throughout the price curve going from zero to infinity, but now it is dispersed within a specified price range.

In the case of a stablecoin or stablecoin pair, a liquidity provider (LP) may decide to assign all capital to the $0.99 – $1.01 range. In such a case, the traders will have more liquidity near the midpoint, and LPs will earn higher trading fees with their cash.

By correcting for the flaws of the original formula, the focused liquidity formula strives to improve capital efficiency. In the new approach, liquidity can now be assigned to a price interval, resulting in a concentrated liquidity position. LPs can open as many positions as they like in the pool, allowing them to tailor their own price curves to their specific needs and tastes.

With its transition to V3 in May of last year, Uniswap converted to concentrated liquidity and has already seen the advantages, with a 500 percent rise in daily volume following the changeover. Similarly, another DEX, Algebra has entered the DEX competition with concentrated liquidity integration to make its case.

On the one hand, Uniswap is built on top of Ethereum, whereas Algebra depends on Polygon as its foundation. The new DEX claims to be more productive with its dynamic pricing, built-in farming, and cross-chain integration capability.

Concentrated liquidity pools appear to be the current craze among DEX players, as multiple concentrated liquidity initiatives have been launched on Solana and Binance Smart Chain, in addition to Ethereum.