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Liquidity concentration gives Liquidity Providers (LPs) the ability to concentrate their capital within custom price ranges, providing greater amounts of liquidity at desired prices. By concentrating liquidity, LPs can provide the same liquidity depth as previous liquidity pools within specified price ranges while putting far less capital at risk.
Liquidity concentration enables higher capital efficiency by allowing LPs to specify ranges instead of the entire pricing curve. Through liquidity concentration, capital can effectively be multiplied thousands of times compared to previous liquidity pools.
The challenge with concentrated liquidity, however, is keeping it "in-range” so that it earns consistent fees. The Pilot protocol’s goal is to allow efficient allocation of capital to Uniswap v3 liquidity pools, as well as similar pools that may appear on other Automated Liquidity Providers (AMMs).
To do this, you want to constantly have your capital allocated to the narrowest range that consistently earns fees. The more capital you have concentrated outside that range, the less you earn.
The differences between minor optimizations can be dramatic.
As an example, imagine if you are choosing whether to concentrate liquidity to the DAI/USDC pair in the 0.99–1.01 price range, or the 0.95–1.05 range. The former range is 5 times more efficient, meaning that if the price spends more than even 20% of its time in that range, that’s a better place to allocate.
The problem, of course, is that if the price moves outside your range, you earn zero fees. Ideally, you’d like to earn both when the price is 0.99–1.01 and when it moves outside that.
For all but the most committed power users, that optimization will require automation and off-loading to a service provider who manages those concentrations for you.
Unipilot is an automated liquidity manager designed to maximize "in-range” intervals for capital through the optimization of the re-balancing mechanism of the liquidity pools.