What Is Concentrated Liquidity?
Concentrated liquidity is the Uniswap v3 idea: instead of spreading your two tokens across every possible price from zero to infinity, you pick a range. Inside that range you are a denser AMM, so you earn more of the fees. Outside it you are 100% the token that nobody wanted at that price, and you earn nothing until price comes back, if it does.
How It Actually Works
- A full-range position is the old v2 experience. A tight range around the current price is closer to active market-making.
- Your position is itself an NFT (usually 721) that records the range and the fees owed. You can transfer the position. You cannot pretend it is passive.
- Impermanent loss gets sharper as the range gets tighter. The calculator is the v2 picture; v3 can be worse.
Risks and Common Mistakes
- Treating a 50% APR on a 0.05% wide range as a savings rate. You are writing options for free and collecting a premium that may not cover the move.
- Forgetting to re-range after a trend. Out-of-range liquidity is just a bag.
- Farming incentive tokens on top of a tight range and counting both as "yield" without the who-pays question.
When It Matters
Any time you click "provide liquidity" on a v3-style venue, including some Solana CLMMs. If you wanted passive exposure, hold the tokens. My Uniswap review is the venue context.
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