What Are the Limitations of the Constant Product Formula in Terms of Capital Efficiency?

The constant product formula (x y=k) is capital inefficient because it spreads liquidity evenly across all possible prices, from zero to infinity. This means that a large portion of the capital in a pool is never actually used, as the price of an asset rarely experiences such extreme fluctuations.

This is particularly true for stablecoin pairs, where the price is expected to remain within a very narrow range. Concentrated liquidity models, like Uniswap V3, were developed to address this limitation by allowing providers to allocate their capital to specific price ranges.