Concentrated Liquidity
Concentrated liquidity is a mechanism introduced by Uniswap V3 that allows liquidity providers to allocate capital within a specific price range rather than across the entire price curve from zero to infinity. Within the chosen range, liquidity behaves like a constant product AMM but at a higher density, providing deeper depth and lower slippage for traders. When the price moves outside the range, the LP position becomes inactive — it holds 100% of one token and earns no fees until the price returns. This design dramatically improves capital efficiency: a position concentrated in a tight range around the current price can provide the same depth as a full-range position with a fraction of the capital. The tradeoff is that LPs must actively manage their positions or accept that they will miss fee income during volatile price moves. Tick-based accounting tracks liquidity at discrete price intervals, and fee tiers (1bp, 5bp, 30bp) let LPs choose compensation for the volatility risk of different pairs.