How Do ‘Concentrated Liquidity’ AMMs Attempt to Improve Capital Efficiency and Reduce Slippage?

Concentrated liquidity AMMs allow liquidity providers (LPs) to allocate their capital within a specific, narrow price range instead of across the entire price spectrum. By concentrating liquidity around the current market price, the effective liquidity in that range is significantly higher.

This mimics a deep order book, resulting in much lower price impact (slippage) for trades executed within that range, thereby improving capital efficiency.