Clear DefinitionsConcentrated Liquidity Pool
1 min read
Pronunciation
[kon-sen-trey-tid lik-wid-i-tee pool]
Analogy
Like placing your cash in a high‑interest tiered savings account only when market rates fall within your target range.
Definition
An automated market maker (AMM) design that lets liquidity providers allocate capital within specific price ranges, increasing capital efficiency compared to uniform pools.
Key Points Intro
Concentrated liquidity enables deeper liquidity and lower slippage within chosen price intervals.
Key Points
Custom ranges: LPs specify lower and upper price bounds.
Capital efficiency: More trading volume per unit of liquidity.
Impermanent loss: Risk concentrated within active ranges.
Rebalancing: LPs adjust ranges as market price moves.
Example
On Uniswap v3, a liquidity provider allocates USDC/ETH liquidity between price 1,900–2,100 USD to earn fees when ETH trades in that band.
Technical Deep Dive
Pool contract tracks position as `ticks` indices. Liquidity L is applied between ticks; swap formulas use sqrt price boundaries. Fee accrual is proportional to time-weighted liquidity within range. NFT position tokens represent ownership.
Security Warning
Narrow ranges can amplify impermanent loss during volatile swings; monitor positions and adjust ranges proactively.
Caveat
Managing active ranges demands more frequent transactions and gas costs.
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