What is concentrated liquidity?
- Author
- CRYPTO PORT Editorial
- Published
- Updated
- Reading time
- 5 min
In short
Concentrated liquidity lets a liquidity provider choose the price range their capital works in. Narrowing the range makes the same capital act like a much deeper book — but once price leaves the range, the position stops trading and ends up holding a single asset. It demands far more management than the original design.
Key points
- The provider chooses the price range their capital covers
- A narrower range makes the same capital go further
- Outside the range the position stops being traded against
- Out of range, the position holds only one of the two assets
Definition
An AMM design in which liquidity providers specify the price range their capital serves; the position trades only inside that range and sits idle outside it.
In the original AMM design, deposited capital spreads thinly across every possible price from zero to infinity. Since trading happens only near the current price, most of it never works. Concentrated liquidity lets you say that your capital should serve, for example, ETH between $3,000 and $3,500 — and within that band the same money forms a much deeper book.
Leave the range and the position stops trading. If price rises through the upper bound, the position is entirely the quote asset (USDC in this example) and captures none of the further rise. Fall through the lower bound and it is entirely ETH. The narrower the range, the more often this happens.
That forces active repositioning as the market moves. Each reset costs swap fees and gas, and fixes the asset mix at that moment's price. A narrow range also amplifies losses from the drifting price ratio. Automated managers exist, but none of them changes the fact that this design needs far more attention than the original one.
Watch out for
- · Out of range you hold one asset only and miss any further move
- · A narrow range magnifies losses from the shifting price ratio, with no guarantee fees cover them
- · Every repositioning costs swap fees and gas, and frequent adjustment adds up