Concentrated Liquidity
Typically, when you provide liquidity to a project, you provide equal values of two assets to a pool. Within that pool, you’re subject to price impact and impermanent loss risks, depending on market conditions. Then, your assets are spread out to be used for trades in any price range, from 0 to infinity, and you earn rewards based on the usage of that liquidity. The problem is – most trades occur within a very specific price range. The result is only a fraction of the liquidity you’ve provided is being used, so your earned rewards are minimal compared to the potential of your full deposit.
With concentrated liquidity, you can designate your liquidity to be used for trades that occur within a specific price range. When the optimal price range is chosen, one that coincides with the current market trends, your assets can work harder for you, and you earn greater rewards.
Last modified 4mo ago