📌 Uniswap Technical Analysis Series #2: Awakening of Dormant Capital Hello, I am BQ Developer. @BQ_Developer In the last episode, we discussed creating a 24-hour automated exchange using the x*y=k formula, and this time we will look at a new dilemma faced by Uniswap. 🤔 A New Problem Created by a Perfect Solution Uniswap V2 was the epitome of simplicity. It solved everything with just the x*y=k formula. However, this simplicity hid a fatal inefficiency. Let's say ETH is trading at $3,000. Most trades will occur between $2,900 and $3,100. But V2 allocates capital equally across all price ranges from $1 to $1 million. Even if there is $100 million in the ETH/USDC pool, the actual money used in the trading range is less than $1 million. The remaining $99 million is just lying dormant. Why is this a problem? From the trader's perspective, slippage increases. The liquidity in the actual trading range is thin. From the LP's perspective, capital efficiency decreases. Most of the capital is not earning fees. ⚙️ V3's Choice: Concentrated Liquidity The Uniswap team chose a fundamental redesign. They allowed LPs to directly choose the price range they wanted. If they set it to provide liquidity only between $2,800 and $3,200, they could create 100 times deeper liquidity in that range with the same capital. Mathematically, this is an astonishing improvement. Capital efficiency has increased by dozens or even hundreds of times. However, the ripple effects of this change went beyond simple efficiency improvements. 🎯 The Cost of Efficiency In V2, LPs were investors. They just had to put in money and wait. In V3, LPs had to become traders. What happens if the price goes outside the set range? The position becomes useless. They can't earn fees and are left holding only one token. They have to wait for it to come back into the range or adjust their position at a loss. An even more significant change was the market structure itself. Professional market makers entered in droves. They monitor the market 24/7, adjust ranges algorithmically, and employ complex hedging strategies. Regular LPs cannot compete with them. In V2, everyone equally shared the fees, but in V3, experts take most of the fees. 💭 The Value of Simplicity What V3 has shown is the fundamental dilemma of DeFi. Pursuing efficiency brings complexity. Complexity creates barriers to entry, and barriers to entry lead to centralization. The inefficiency of V2 was, in fact, the cost of democratic accessibility. Anyone could participate, and everyone earned fairly. It was inefficient, but it was closer to the ideal of decentralization. V3 has created better tools. But only a few can use those tools effectively. Was this a wrong choice? I don't think so. Isn't efficiency essential for DeFi to grow? However, we now know that every improvement comes at a cost. ✏️ In the next episode While V3 solved the capital efficiency problem, developers have started to demand new things. "Isn't it possible to create an AMM suited to each situation?" In the next article, we will discuss how V4 responded to this demand! --- Your likes and shares are love 🥰 #BQDeveloper #Uniswap #V3 #CostOfEfficiency