Uniswap V3 vs Uniswap V2 Style Liquidity

Concentrated Liquidity: LPs can allocate capital to specific price ranges (e.g., $1,800 - $2,200 for ETH/USDC). This yields up to 4000x higher capital efficiency for stable pairs and tighter ranges. This matters for professional LPs and protocols seeking maximal fee yield on large TVL.

Multiple Fee Options: Pools can be created with 0.01%, 0.05%, 0.30%, or 1.00% fees. This allows for optimized pricing based on pair volatility (e.g., 0.05% for ETH/USDC, 1% for exotic altcoins). This matters for protocols tailoring economics and for LPs to match risk/reward.

Uniform Liquidity: Capital is distributed evenly across the entire price curve (0 to ∞). This eliminates impermanent loss management and range monitoring. This matters for passive LPs, new users, and protocols where 'set-and-forget' liquidity is a priority.

Fungible LP Tokens: V2 LP tokens (e.g., UNI-V2) are standard ERC-20s, making them widely accepted as collateral across DeFi (Aave, Compound, Yearn). V3's non-fungible positions (NFTs) have fragmented support. This matters for protocols building on liquidity or users seeking leveraged yield strategies.

• Professional Market Making: Maximizing APR on stablecoin or correlated asset pairs (e.g., USDC/DAI, wBTC/renBTC).
• Tailored Protocols: Building a perps DEX or options platform needing granular liquidity.
• Large Capital Deployment: Institutions needing precise risk-defined positions.

• Passive & Long-Term LPs: Holding blue-chip uncorrelated pairs (e.g., ETH/DAI) without active management.
• Maximum Composability: Using LP tokens in money markets or as collateral in other dApps.
• Protocol Simplicity: Forking or building on a battle-tested, straightforward liquidity model.

Concentrated Liquidity: LPs can allocate capital to specific price ranges (e.g., $1800-$2200 for ETH). This can provide up to 4000x more capital efficiency than V2 for the same depth. This matters for professional market makers and high-volume pairs where idle capital is costly.

Multiple Fee Tiers: Supports 0.01%, 0.05%, 0.30%, and 1.00% fees per pool. This allows LPs to be compensated appropriately for different risk profiles (e.g., 0.05% for stablecoin pairs like USDC/USDT, 1% for exotic altcoins). This matters for optimizing returns based on pair volatility.

Passive, Full-Range Liquidity: LPs provide liquidity across the entire price curve (0 to ∞). This eliminates active management overhead and impermanent loss hedging complexity. This matters for retail LPs, long-term holders, and protocols using liquidity as a simple, set-and-forget primitive.

Fungible LP Tokens: V2 LP tokens (e.g., UNI-V2) are ERC-20 tokens uniformly representing a share of the pool. This makes them easily integrated as collateral across DeFi protocols like Aave, MakerDAO, and Compound. This matters for leveraged farming strategies and money legos.

Requires Constant Monitoring: Concentrated positions can become 100% inactive if the price moves outside the set range, earning zero fees. This introduces gas costs for rebalancing and necessitates tools like Arrakis Finance or Gamma Strategies. This matters for LPs without automation infrastructure.

Capital Spread Thinly: Most liquidity is deployed at prices far from the current market rate, which is ineffective for trading. To achieve the same depth as a concentrated V3 position, V2 requires orders of magnitude more capital. This matters for protocols seeking deep liquidity with limited treasury funds.

Passive, full-range liquidity: Liquidity is distributed across the entire price curve (0 to ∞). This eliminates the risk of liquidity fragmentation and impermanent loss from price ranges expiring. It's ideal for long-term holders of blue-chip pairs (e.g., ETH/USDC) who want a truly 'set-and-forget' position.

Single transaction for liquidity: Adding/removing liquidity requires only one on-chain interaction per token pair. This results in ~30-50% lower gas fees per LP action compared to V3's multi-step range management. Best for smaller LPs or protocols automating treasury management where transaction cost is a primary constraint.

Low fee-earning density: Most liquidity sits unused at prices far from the current market. To match V3's depth at the current price, V2 requires 100-400x more capital. This leads to lower Annual Percentage Yield (APY) for LPs and higher slippage for traders on large orders in volatile markets.

Fixed 0.30% fee for all pairs: Cannot adapt to the volatility profile of different assets. This is suboptimal for stablecoin pairs (e.g., USDC/DAI), where 0.05% is standard, and for exotic assets that may require a 1% fee. This rigidity has led to TVL migration to V3 and forks like PancakeSwap V3 for tailored fee structures.