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:
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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