Clear DefinitionsUniswap v3 Concentrated Liquidity
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Pronunciation
[yoo-nee-swop vee-three kon-san-tray-ted li-kwid-i-tee]
Analogy
Think of concentrated liquidity like placing your resources exactly where demand is highest, rather than spreading them evenly.
Definition
A model where liquidity providers allocate capital within custom price ranges to concentrate liquidity and earn higher fees.
Key Points Intro
Concentrated liquidity boosts capital efficiency by targeting narrow price bands.
Key Points
Custom ranges: set lower and upper ticks for liquidity
Fee tiers: choose fee levels based on volatility expectations
LP NFTs: positions represented as ERC-721 tokens
Impermanent loss: risk increases if price exits range
Example
A provider allocates 10 ETH–USDC liquidity between price ticks 2 000–2 500, concentrating capital around the current market price for higher fee accrual.
Technical Deep Dive
Positions track `liquidity`, `tickLower`, and `tickUpper`. The pool’s swap function iterates through active ticks, adjusting `sqrtPriceX96` and updating liquidity deltas. Fee growth per liquidity is recorded for each tick range, and NFT metadata encodes position parameters.
Security Warning
Incorrect range configuration can lead to rapid liquidity depletion and significant impermanent loss.
Caveat
Active management is required; static positions may underperform in volatile markets.
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