Does Concentrated Liquidity Increase or Decrease the Overall Pool’s Resistance to Large Trades (Slippage)?
Concentrated liquidity significantly increases the pool's resistance to large trades within the concentrated range, thereby decreasing slippage. By having more capital deployed near the current market price, the reserves are deeper in that specific area of the curve.
This means a large trade causes a smaller percentage change in the reserves within that range compared to a standard AMM with the same total TVL. However, slippage increases dramatically once the trade pushes the price outside the concentrated range.
Glossar
Resistance
Threshold ⎊ The concept of resistance, within cryptocurrency derivatives and options trading, fundamentally represents a price level where selling pressure historically outweighs buying interest, impeding further upward price movement.
Price Impact Curve
Slippage ⎊ Price impact curves, within cryptocurrency and derivatives markets, delineate the relationship between trade size and resultant price movement; larger orders inherently induce greater price deviations from the prevailing mid-price due to limited liquidity.
Large Trades
Execution ⎊ Large trades, within cryptocurrency and derivatives markets, represent order flow significantly impacting short-term liquidity and price discovery, often originating from institutional investors or high-frequency trading firms.
Concentrated Liquidity
Allocation ⎊ ⎊ Concentrated liquidity represents a departure from traditional automated market maker models by enabling liquidity providers to specify precise price ranges where their capital will be deployed, fundamentally altering capital efficiency.
Concentrated Range
Range ⎊ A concentrated range, within the context of cryptocurrency derivatives and options trading, denotes a price interval exhibiting heightened trading activity and order flow, often characterized by a compression of implied volatility and a discernible reduction in price fluctuation.