Concentrated Liquidity

Overview

Providing liquidity is essential for decentralized exchanges like Yowie Finance to function. It allows users to trade assets on the platform while ensuring sufficient funds are available for transactions. Liquidity providers (LPs) earn swapping fees from the pairs they supply liquidity to. Your liquidity can earn even more rewards if it’s staked in Yowie Farms on Monad.

Concentrated Liquidity

The Idea

A key feature of Yowie Finance (Uniswap V3) is concentrated liquidity, which allows LPs to allocate liquidity within a specific price range. In earlier V2‑style AMMs, liquidity was distributed uniformly across the entire price curve from 0 to ∞.

Uniform distribution enabled trading throughout the whole interval (0, ∞), but in many pools a large portion of that liquidity remained unused.

Take stablecoin pairs, for example, where relative prices tend to remain near parity. Liquidity outside the typical trading band is seldom utilized. For instance, in a typical V2 DAI/USDC pair, only a small fraction of total capital is actually active within the tight $0.99–$1.01 range where most volume (and thus most fees) occurs.

With concentrated liquidity, LPs can focus capital within smaller, chosen price intervals. For a stablecoin/stablecoin pair, an LP might allocate solely to the 0.99–1.01 range. This results in deeper liquidity around the mid‑price, better pricing for traders, and higher capital efficiency for LPs. Each finite‑interval allocation is a position. LPs can hold multiple positions in one pool, creating custom price curves that reflect individual strategies.

LPs can combine positions to shape nearly any curve—approximating other AMMs or even range orders. Traders interact with the aggregate liquidity of all positions with no extra gas cost per LP. Fees collected within a given range are distributed proportionally to LPs based on the liquidity they contributed there.

Active Liquidity

As market price moves, it may exit the bounds of a given position. When the spot price is outside a position’s range, that position’s liquidity is inactive and stops earning fees. If price re‑enters the range, the liquidity becomes active again and resumes earning.

Over time, swaps within a range push the position’s inventory toward one asset or the other. In V2 this “going all in one asset” was less common because positions implicitly spanned (0, ∞). With concentrated ranges, inventory polarizing is expected—another reason many LPs run multiple overlapping positions.

Non‑Fungible Liquidity

Because custom price curves differ per LP, positions are non‑fungible and represented as NFTs (LP NFTs) rather than ERC‑20s in the core. Common/shared strategies can still be made fungible via peripheral contracts or partner protocols. Trading fees are not auto‑compounded into the pool; strategies may choose to reinvest or redistribute them.

In practice, increasingly sophisticated strategies can be tokenized—multi‑position bundles, automated rebalancing to keep liquidity centered on price, fee reinvestment, lending overlays, and more.

The Role of Ticks

To implement concentrated liquidity, price space is divided into discrete steps called ticks. Each tick represents a fixed spacing in price (e.g., ~0.01% increments depending on the fee tier’s tick spacing). LPs choose lower and upper ticks to define their range; liquidity is active only while spot price is between those ticks.

Tick spacing determines how finely ranges can be placed. Wider spacing (often at higher fee tiers) means coarser ranges; narrower spacing enables finer control but can increase position management overhead.