// GLOSSARY -- DEFI

What is Concentrated Liquidity?

1 min read Updated

Concentrated liquidity allows liquidity providers to allocate capital within specific price ranges rather than across the entire price curve — dramatically improving capital efficiency introduced by Uniswap V3.

WHY IT MATTERS

In Uniswap V2, liquidity is spread from $0 to $∞ — most of it is never used because the price trades in a narrow range. V3's concentrated liquidity lets LPs choose their range: provide ETH/USDC liquidity between $2000-$3000, for example.

The capital efficiency improvement is massive — 10-100x more effective use of capital. This means less capital is needed to provide the same depth of liquidity, reducing slippage for traders.

The tradeoff: active management. When price moves outside your range, your position stops earning fees and becomes 100% the less valuable token. LPs must actively adjust ranges — or use automated position managers.

FREQUENTLY ASKED QUESTIONS

Is concentrated liquidity better for LPs?
Higher fee income per dollar of capital, but requires active management and amplifies impermanent loss within the range. It's better for sophisticated LPs, worse for passive ones.
What happens when price leaves my range?
You stop earning fees and your position is 100% the less valuable token. You must withdraw and reposition at the new price, or use a position manager that does this automatically.
What are position managers?
Protocols (Gamma, Arrakis) that automatically adjust concentrated liquidity ranges based on price movements. They handle the active management, charging a fee for the service.

FURTHER READING

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