🚀 The era of V2: The 'egalitarianism' of automated market making
Liquidity trading on BSC was initially dominated by the V2 model, which we know as PancakeSwap V2 or Uniswap V2. The core logic of this version is — the constant product formula:
x * y = k
Where x and y represent the reserves of two tokens, and k is a constant. This means that no matter how the price fluctuates, the liquidity pool will always automatically adjust the ratio based on this formula.
The advantages of V2 are:
✅ The mechanism is simple and intuitive, users can provide liquidity at any time to earn fees.
✅ All price ranges have liquidity, and trading can always occur.
✅ Low threshold, anyone can easily become an LP (liquidity provider).
But the problem is also obvious:
❌ Low liquidity efficiency, with most funds distributed in 'unused' price ranges.
❌ Impermanent loss is serious, especially in one-sided markets.
❌ Market-making funds are passive and cumbersome, unable to be finely adjusted according to strategies.
For instance:
If you provided 1 BNB + 300 USD of liquidity in the V2 pool, then whether the price of BNB rises to $800 or falls to $100, your funds are still 'evenly distributed' across the entire price range. This means that most of the time, your liquidity is completely ineffective when the 'price moves away from the current range'.
Thus, V3 emerged.
🧭 The revolution of V3: concentrated liquidity and active market making
V3 is a 'cognitive upgrade', not just a functional enhancement. The design idea of V3 is to allow liquidity providers (LP) to actively decide in which price range to provide funds.
For example, if you believe the price of BNB will fluctuate between $400 and $500,
then you can provide liquidity only within that range.
Once the price leaves this range, your funds will automatically 'withdraw' from the market. This design brings two significant changes:
💡 More concentrated liquidity —— market depth significantly improves in target ranges.
💸 Higher yield —— because the same funds undertake more transactions in a narrower range.
This is the biggest highlight of V3:
Liquidity is no longer a passive participation, but a 'strategic deployment'.
At the same time, V3 introduces multiple fee tier levels, such as:
0.01% (suitable for stablecoin pairs)
0.05% (mainstream assets)
0.3% (ordinary tokens)
1% (highly volatile meme coins or altcoins)
This means that project parties can choose different fee pools according to the token attributes, thereby affecting transaction costs, slippage experiences, and the types of liquidity attracted.
🧩 Insights for project parties: V3 = stronger market control
In the V2 era, after the project went live, the token price was completely market-driven, and liquidity was easily inflated or drained, causing chart instability. In the V3 model, project parties can:
🎯 Lock in price ranges through custom intervals to stabilize initial prices;
💧 Use a small amount of funds to create depth and optimize K-line visuals;
🧠 Combine smart market making strategies (like CiaoTool) to achieve batch control of multiple range pools.
🔐 Set different fee pools to distinguish between speculative and long-term users.
In other words, V3 makes project parties' 'liquidity management' more like doing 'quantitative operations'—you are not passively putting money in, but actively choosing 'where the funds should appear.'
💥 From the trader's perspective: V3 changes your ordering experience.
For ordinary traders, the advantages of V3 are equally obvious. Within the concentrated liquidity range, the depth is greater, and the slippage is lower. This means that in meme coins and short-term tokens, the trading experience is closer to centralized exchanges (CEX).
But the risk is: if the price breaks through the current range, trading liquidity will disappear instantly. This is also why you may see 'sudden huge slippage' on some small coins.
When the price leaves the liquidity range, trading will execute 'cross-range', causing slippage to multiply. Therefore, in the V3 environment, traders need to pay more attention to the liquidity distribution of the pool.
🧮 Liquidity strategies and actual cases: V3's quantitative thinking
The core of V3 is actually a kind of 'fund curve optimization'. Under the traditional V2 model, $10,000 might only generate $5 in fee income; but in V3, if set correctly, the same funds can earn $100+ in income. Some quantitative teams will adopt:
🧩 Multi-range layered deployment strategy: spread risk across multiple overlapping ranges;
📊 Slippage arbitrage strategy: using range changes to trigger reverse trades;
🔄 Automatic rebalancing robot: continuously adjusting range boundaries.
Ordinary project parties can also leverage tools like CiaoTool (https://bsc.ciaotool.io/) to strategically manage liquidity through one-click batch deployment or smart buying operations, even without technical capabilities.
🌐 The application of CiaoTool: lowering the operational threshold for V3.
For project parties, although V3 market making is flexible, it is technically more complex. The BSC tool module of CiaoTool is designed for this purpose.
👉 It allows:
One-click token creation + liquidity initialization;
It may also achieve in the future:
Batch wallet operations (such as multi-address buying, locking);
Intelligent control of liquidity ratios;
Automated market making and monitoring functions.
This means project parties do not need to understand complex AMM mathematics or write contract code to achieve market control similar to 'quantitative level' through simple operations.
CiaoTool makes V3's 'active market making' accessible to the public.
🧠 V3 is the future, and understanding is the ticket
V2 is the era of 'liquidity democratization'; V3 is the era of 'liquidity elitism'.
On the BSC chain, the logic of V3 is not just a technical upgrade, but represents a new market ecosystem thinking—liquidity is no longer wasted but becomes precisely scheduled capital tools.
In the future, whether you are a project party, a market maker, or an ordinary trader, understanding the mechanism of V3 means you are on the prepared side in the game.
Tools like CiaoTool are precisely helping the entire ecosystem build a bridge from 'understanding' to 'execution'.
In the V3 world on the BSC chain, don't just issue tokens or trade, try to understand the underlying liquidity logic. Because understanding is the key for you to be half a step faster than others in the next bull market.
