Concentrated Liquidity

Concentrated liquidity is a feature in decentralized exchanges (DEXs) that allows liquidity providers (LPs) to allocate their capital within a specific, customizable price range instead of spreading it evenly across the entire price spectrum. This targeted allocation means that liquidity is focused where most trading activity happens, increasing capital efficiency for LPs and offering better trading conditions for users.

Benefits

Because liquidity is provided only within a defined price interval, traders benefit from deeper liquidity near the current market price, which significantly reduces slippage on trades. This creates tighter spreads and more price stability in these active trading zones. For liquidity providers, concentrating their capital in narrower price bands leads to higher fee earnings on their deployed capital compared to traditional AMMs that distribute liquidity uniformly.

How It Works

Liquidity providers define the lower and upper bounds of their preferred price range when committing assets. If the market price moves outside this range, their liquidity becomes inactive and does not participate in trades or fee earnings until the price returns to the specified interval. This mechanism encourages active management of liquidity positions to maximize returns.