In our last tutorial, we broke down the basics of SushiSwap’s v2 and v3 liquidity models. Now let’s go deeper using ETH/USDC as our working example to understand what it really means to LP in v3.
Yes, v3 is more efficient. Yes, it can earn more. But it also demands more from you — more precision, more decision-making, and more management. Let's break it down below.
What is v2?
v2 is the classis AMM model, LPing is simple and relatively passive.
Let’s say ETH is trading at $2,000, and you want to provide $2,000 of liquidity to the ETH/USDC pool. You’d deposit:
0.5 ETH (worth $1,000)
1,000 USDC
That’s because v2 requires a 50/50 split by value, no matter the price or trend. Your liquidity is spread evenly across the entire price spectrum, from near zero to infinity.
Your position is always active, meaning it can always be used in swaps. But here’s the catch: most of your capital is rarely used.
For example, if ETH is trading between $1,800 and $2,300 for weeks, only the liquidity in that band is earning fees. The rest, say, ETH at $500 or $4,000, just sits idle, doing nothing.
v2 is great for simplicity, but it’s not capital efficient. Most of your liquidity earns nothing.
What is v3?
SushiSwap v3 introduces concentrated liquidity, a major improvement in capital efficiency for liquidity providers.
Instead of spreading your liquidity across all possible prices like in v2, you choose a specific price range where your capital is active.
Let’s say ETH is trading at $2,000, and you expect it to stay between $2,000 and $2,800 for the next few weeks. With v3, you can concentrate your liquidity only in that range.
If traders swap ETH/USDC while ETH is within your range, you earn more fees, because 100% of your capital is deployed where trades are actually happening. In contrast, v2 would have spread that same capital across every possible price point, including areas that never see volume.
This is what makes v3 more capital-efficient: you earn more with less, as long as you stay in range.
But remember, if ETH moves outside your selected range, your position goes inactive and that’s where active management comes in. We’ll get to that next.
v3 is not 50/50
Unlike v2, v3 does not require you to deposit equal value amounts of ETH and USDC.
Let’s say ETH is at $2,000.
If your range is entirely above the current price (for example, $2,600 to $3,200), your position will consist almost entirely of USDC.
If your range is entirely below the current price (for example, $1,600 to $1,900), your position will consist mostly of ETH.
The ratio depends on how close the current price is to the center of your selected range.
But don’t worry. After you select your price range, SushiSwap automatically handles the token split for you. It calculates how much ETH and USDC you need and performs any necessary internal swaps before adding your position to the pool.
So, What’s the Catch?
With great rewards comes great responsibility. Let’s look at the three biggest tradeoffs for LPs in v3:
You Need to Be Market-Sensitive
In v3, you only earn fees if ETH stays within your range.
Let’s say you provided liquidity in the $2,000–$2,800 range.
That worked well… until ETH pumped to $3,000. Now your position is out of range.
❌ No swaps are routed through your liquidity
❌ You stop earning fees
❌ Your capital is idle
You can update your position but you’ll need to react fast, pay gas, and choose a new range.
This isn’t passive yield farming. This is active management.
You Need to Be Time-Invested
v3 is not set-and-forget.
To keep earning, you need to:
Monitor price movements
Adjust your range as needed
Withdraw and re-deploy when price exits your range
Factor in gas fees, execution timing etc
For example:
You originally LP’d in the $2,000–$2,800 range. Now ETH is at $3,000.
If you believe it will keep climbing, you might reposition to $2,800–$3,500 — placing your capital where the next round of trades will likely happen.
That’s a strategy decision. v3 turns LPing into a trading mindset.
🤖 Don’t Want to Do It Manually?
If active management isn’t your thing, no problem. That’s where liquidity managers come in.
These protocols handle range selection, rebalancing, capital deployment aka position management. Perfect for LPs who want better yields without keeping track of the price all day.
Here are a few tools that support SushiSwap v3 on Katana:
Each uses different strategies, from vaults to dynamic curves, but all aim to keep your capital in-range and productive.
We’ll cover them in more detail in another post.
Impermanent Loss Still Exists — and Can Be Worse
A common myth: “v3 eliminates impermanent loss.” That’s false.
In fact, v3 can amplify impermanent loss — especially with tight ranges and volatile assets.
Example: You LP in the $2,000–$2,800 range. ETH climbs to $3,000 and never returns.
As ETH rises, your ETH is sold for USDC. If ETH keeps climbing, you’re left with mostly USDC and miss out on the ETH upside.
That’s impermanent loss. Just more concentrated.
We’ll break this down fully in the next article.
TL;DR — LPing in v3
v3 lets you choose where your capital works — not just throw it everywhere
It’s not 50/50 — your ratio depends on price and range. If you’re in range, you earn more. If you’re out of range, you earn nothing
Managing positions requires a trading mindset, or using automation
Impermanent loss is still real and must be managed carefully
If you’re ready to take control and optimize returns, v3 is a powerful tool. If not, consider passive tools or liquidity managers to help you stay in the game.
