What is Concentrated Liquidity？How to add single-sided liquidity?

Most of you are probably no strangers to adding liquidity on Uniswap or other DEXs. Typically, you’d get two tokens of equal value, say ETH and USDC, deposit them together into a pool, and become a proud Liquidity Provider (LP), earning those sweet trading fees. This “dual-asset campaign” model is something you’re all very familiar with.

But have you ever wondered, what if I only have one type of token on hand right now? Or what if I just want to “buy” or “sell” another token at a specific price point, while also pocketing some fees?

In the world of Uniswap V3, the answer is: It’s possible! And that’s what we’re diving into today—”single-sided liquidity.”

The Core Concept: Uniswap V3’s “Concentrated Liquidity”

To understand single-sided liquidity, you first need to grasp Uniswap V3’s core innovation: Concentrated Liquidity.

Recall that in the V2 era, the liquidity you provided was spread out across the entire price curve, from zero to infinity. This meant that no matter how the market price fluctuated, your funds were “working,” but perhaps not very efficiently, as a large portion of your capital might be far from the current active trading price.

Uniswap V3 allows you to “concentrate” your liquidity within a specific price range that you set. For example, if you believe ETH’s price will hover between $2,800 and $3,200 USDC, you can commit your ETH and USDC liquidity solely to this range. The advantage here is that when the price is within your set range, your capital is utilized more effectively, theoretically earning you more fees.

How is Single-Sided Liquidity Achieved?

Alright, here’s the kicker. Since you can freely set your price range, something magical happens when the range you set is entirely above or entirely below the current market price—you only need to provide one type of token!

Let’s take an example. Assume the current market price of ETH is $3,000 USDC:

1. If you want to sell ETH for USDC when ETH’s price rises to $3,500 – $3,600:

   • You can set a price range, for instance, with a minimum price of $3,500 USDC and a maximum price of $3,600 USDC.
   • Because this range is entirely above the current market price ($3,000), the system interprets your goal as “providing ETH to be bought (in exchange for USDC)” once the price climbs. Therefore, at this point, you only need to provide ETH to establish a liquidity position in this range.
   • When ETH’s price indeed rises to between $3,500 and $3,600, your ETH will gradually be bought by traders, converting into USDC. If the price falls out of this range again, your position might then be entirely in USDC.

2. If you want to buy ETH with USDC when ETH’s price drops to $2,400 – $2,500:

   • You can set a price range, say, with a minimum price of $2,400 USDC and a maximum price of $2,500 USDC.
   • Because this range is entirely below the current market price ($3,000), the system sees your objective as “using USDC to buy ETH” when the price falls. So, in this scenario, you only need to provide USDC to create a liquidity position in this range.
   • When ETH’s price does drop to between $2,400 and $2,500, your USDC will gradually be used to buy ETH. If the price then rises above this range again, your position might be entirely in ETH.

See how it works? The essence of single-sided liquidity is that you’re concentrating your liquidity in a price range that hasn’t been touched yet. The pool anticipates the price moving into your range, so it only requires you to provide the token that would be “traded away” within that range.

Use Cases for Single-Sided Liquidity

Now that we understand the principle, let’s look at some practical scenarios for single-sided liquidity:

1. Smarter “Limit Orders” (Range Orders):

   • Want to buy or sell at a specific price but don’t want to miss out on potential fee earnings? Single-sided liquidity can help.
   • Scenario: You hold USDC and want to buy ETH when it drops near $2,500. You can provide USDC into a narrow range, like $2,490-$2,510. If ETH’s price falls into this range, your USDC will be used to purchase ETH, and if there are trades within this range, you’ll also earn fees! This can be more advantageous than a simple limit order on a centralized exchange (though it has its own specific risks, like needing to manage the position if the price moves through your range).
   • Similarly, if you hold ETH and want to sell around $3,500, provide ETH into a range like $3,490-$3,510.

2. Gradual Position Building or Exiting:

   • Don’t want to buy or sell a large amount of tokens all at once? You can set up a series of single-sided liquidity positions at different price points to gradually complete your operation.

3. Bullish/Bearish on a Specific Asset and Aiming to Profit:

   • Bullish on A, holding B: You’re very optimistic about Token A’s future price and currently hold Stablecoin B. You can add B as single-sided liquidity to the A/B pair, with the price range set below A’s current market price. When A’s price drops into your target range, your B will be used to buy A.
   • Bearish on A, holding A: You believe Token A’s price will fall and want to sell at a higher point. You can add A as single-sided liquidity to the A/B pair, with the price range set above A’s current market price. When A’s price rises into your target range, your A will be sold for B.

4. Temporarily Not Wanting to Hold Both Sides of an Asset:

   • Perhaps you only have one type of token but still want to participate in a pool’s liquidity mining or earn fees (provided, of course, the price enters your range).

What Happens When You Withdraw Liquidity?

When you remove liquidity, you’ll get back the tokens currently in your position.

• If you added single-sided liquidity and the market price never entered your set range, you’ll withdraw the single token type you initially provided.
• If the price did enter your range, your tokens might have been partially or fully converted into the other token. For example, if you provided USDC single-sidedly to buy ETH at a lower price, and the price did fall into your range, your USDC bought ETH. When you withdraw, you might get ETH, or a mix of ETH and USDC.

Important Notes and Risks:

• No Earnings Out of Range: If the market price never enters your set price range, your liquidity is “idle” and won’t earn any trading fees.
• Active Management: Uniswap V3’s concentrated liquidity (including single-sided) generally requires more active management. You need to monitor market prices and potentially adjust your price ranges based on market changes.
• Impermanent Loss (IL): As long as your liquidity is within an active trading range (i.e., the price is within your set boundaries), the risk of Impermanent Loss still exists. Single-sided provision doesn’t completely eliminate IL; it just means your asset composition is singular when your position is entirely out of range.

In Summary

Uniswap V3’s single-sided liquidity opens a new door for those familiar with dual-asset LPs. It leverages the feature of concentrated liquidity, allowing you to participate in market-making with just one token under specific conditions. This not only enables functionalities similar to limit orders but also offers the chance to earn fees while waiting for the price to reach your target, adding more flexibility and potential profit to your DeFi strategies.

Hopefully, this article helps you better understand and utilize Uniswap V3’s single-sided liquidity!