Concentrated Liquidity
An AMM design from Uniswap v3 where liquidity providers allocate capital to a chosen price range for greater depth and capital efficiency.
Concentrated liquidity is an automated market maker design, introduced by Uniswap v3, that lets liquidity providers allocate capital to a specific price range instead of spreading it across every possible price. Within the chosen range, the position provides the same depth as a much larger conventional position, so traders get better prices from less capital.
Prices in these pools are divided into ticks, and each position is defined by a lower and an upper tick. While the market trades inside the range, the position earns swap fees. If the price moves outside the range, the position stops earning and converts entirely into one of the two tokens. Because every position has custom bounds, positions are not interchangeable, so Uniswap v3 represents them as NFTs (LP NFTs) rather than fungible LP tokens.
The capital efficiency comes with obligations. Providers must choose ranges, monitor them, and rebalance when the market drifts, which makes passive provision harder than in constant product pools. Impermanent loss is also amplified: the tighter the range, the faster the position converts into whichever asset is falling, so narrow ranges are effectively a more leveraged bet on the price staying put.
Concentrated liquidity also enables new primitives. A range placed entirely above the market acts like a limit sell order, which is how single-sided token launches seed a pool with nothing but the new token. Tight ranges around a peg power efficient stablecoin pairs, and newer systems such as Uniswap v4 extend the model with hooks that customize pool behavior.