DEX Wants To Enter Uniswap With Its Concentrated Liquidity Bet

Decentralized exchange protocols (DEX) have become an important part of the decentralized financial (DeFi) ecosystem, where liquidity and liquidity providers play a vital role in keeping the vastly expanding space moving.

While DEX protocols have seen billions in daily trading volume, the liquidity market is gradually shifting from traditional liquidity methods to concentrated liquidity. Previous liquidity was distributed uniformly along the price curve between zero and infinity, while in the new system, liquidity is allocated within an adjusted price range.

For example, in the case of a stablecoin/stablecoin pair, a liquidity provider (LP) may decide to allocate capital entirely in the $0.99 – $1.01 range. As a result, traders will have more liquidity around the mid-price and LPs will earn more trading fees from their cash.

The concentrated liquidity formula aims to improve capital efficiency by compensating for the shortcomings of the original formula. In the new model, liquidity can now be assigned to a price range, resulting in a concentrated liquidity position. LPs can open as many positions in the pool as they want, allowing them to create their own price curves based on their specific needs and preferences.

Uniswap switched to concentrated liquidity with the switch to V3 in May last year and is already reaping the benefits, with a 500% increase in daily volume following the switch. Likewise, another DEX called Algebra has come forward to put its claims in the DEX race with concentrated liquidity integration.

On the one hand, Uniswap works on top of Ethereum, while Algebra chose Polygon as its base layer. The new DEX claims to be more efficient with its dynamic pricing, built-in farming, and support for cross-chain integration.

Speaking of the major advantages of Algebra over Uniswap, Alexandra Korneva, the co-founder of the DEX, told Cointelegraph:

“Uniswap has no farming on the platform, so users need to request third-party smart contracts for farm tokens. To improve this situation, Algebra has introduced built-in agriculture; allowing users to push their additional tokens to pools and earn rewards. You don’t need access to external platforms to farm and make a profit.”

Related: Uniswap Launches Venture Capital Wing for Web3 Investments

Concentrated liquidity pools seem to be the latest trend among DEX players as there have been several concentrated liquidity projects on Solana and Binance Smart Chain not only on Ethereum.

Leave a Reply

Your email address will not be published. Required fields are marked *