Concentrated Liquidity

Concentrated liquidity lets providers choose a price range for their capital instead of spreading it from zero to infinity. Uniswap v2-style AMMs place liquidity across all prices, most of it unused. Uniswap v3 lets you say you will make a market in ETH/USDC only between $1,800 and $2,200. Inside that range each dollar earns more fees.

Efficiency gains can be large. A tight position can be about 100x more capital-efficient than a full-range one. If price leaves your range, you earn nothing and still take impermanent loss. You have to watch and move ranges. Automated managers such as Arrakis and Gamma do that for a fee. Impermanent loss is sharper because rebalancing happens over a narrower band.

Professional LPs treat this as active trading, not passive yield. Traditional AMMs like Uniswap v2 distribute liquidity uniformly from zero to infinity, most of which sits unused since prices rarely move to extreme values. ' Within that range, the LP's capital works much harder, earning more fees per dollar deployed. The trade-offs are major.

If price moves outside your range, your liquidity becomes inactive, earning nothing while still exposed to impermanent loss. The Uniswap v3 whitepaper (2021) lets LPs pick a price range. Capital outside that range earns no fees.