Technical Concepts
Concentrated Liquidity
AMM liquidity allocated to a bounded price range
Definition
Concentrated liquidity allocates AMM capital to a bounded price range instead of the full curve. In Uniswap v3, only in-range liquidity earns swap fees; beyond a boundary, the position holds one asset until price re-enters or the LP repositions.
Example
A Uniswap v3 ETH/USDC position spans $1,800 to $2,200 per ETH. At $2,300 it is entirely USDC, excluding accrued fees, and earns no new swap fees; at $1,700 it is entirely ETH.
How it works
The LP chooses lower and upper ticks and supplies the required token amounts. Swaps consume liquidity active at each tick; crossing a boundary activates or deactivates positions.
Risks to Consider
- A narrow range increases inventory conversion and underperformance
- Out-of-range liquidity stops earning swap fees
- Repositioning realizes trading costs and exposes the LP to adverse selection
Common Questions
Is concentration the same as automatic liquidity shaping?
No. Concentration defines where liquidity sits. Shaping can distribute or move it according to a strategy; a fixed v3 range does not follow price automatically.
