How Concentrated Liquidity Works?

Traditional AMMs distribute liquidity uniformly across all possible price ranges (0 to ∞). Concentrated liquidity allows you to allocate capital only within specific price ranges where you expect trading activity

For example, in a stable-coin pair like USDC/USDT that trades around $1.00, you can concentrate liquidity between $0.98-$1.02 instead of the entire range, resulting in 200-300x higher capital efficiency.

Concentrated liquidity positions follow the formula:

x+yP=L(PuPl)x + \frac{y}{\sqrt{P}} = L \cdot \left( \sqrt{P_u} - \sqrt{P_l} \right)

Where:

  • x and y are token amounts

  • P is the current price

  • Pl and Pu are lower and upper price bounds

  • L is the liquidity amount provided

Active vs Inactive Liquidity

Your liquidity position is active when the current price falls within your selected range. Active positions:

  • Generate trading fees

  • Participate in swaps

  • Maintain balanced token ratios

When prices move outside your range, positions become inactive:

  • No fee generation

  • Consist entirely of one token

  • Require rebalancing to resume earning

Liquidity Provider Benefits

  • Higher Capital Efficiency: Concentrate capital where trading actually occurs, earning more fees per dollar invested.

  • Customizable Risk Management: Choose wider ranges for stability or narrow ranges for higher returns.

  • NFT-Based Positions: Each liquidity position is represented as a unique NFT, providing full ownership and transferability.

  • Flexible Fee Collection: Claim earned fees without removing underlying liquidity, enabling efficient capital management.

Trader Benefits

  • Lower Slippage: Concentrated liquidity provides deeper depth around current prices, reducing price impact.

  • Better Price Discovery: More accurate pricing due to liquidity concentration in active trading ranges.

  • Reduced Trading Costs: Improved efficiency translates to better execution prices.

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