Concentrated Liquidity in Automated Market Makers

TL;DR

This paper analyzes the impact of concentrated liquidity on automated market makers, comparing provider returns before and after its introduction, and evaluates various strategies using historical data to identify optimal approaches under different conditions.

Contribution

It provides the first comprehensive comparison of liquidity provider returns pre- and post-concentrated liquidity implementation and assesses multiple strategies' performance using real trade data.

Findings

Concentrated liquidity significantly alters liquidity provider returns.

Certain strategies outperform others depending on market conditions.

The paper offers insights into optimal liquidity provision strategies for different trading pairs.

Abstract

We examine how the introduction of concentrated liquidity has changed the liquidity provision market in automated market makers such as Uniswap. To this end, we compare average liquidity provider returns from trading fees before and after its introduction. Furthermore, we quantify the performance of a number of fundamental concentrated liquidity strategies using historical trade data. We estimate their possible returns and evaluate which perform best for certain trading pairs and market conditions.