How Do Concentrated Liquidity Pools Attempt to Mitigate Impermanent Loss?
Concentrated liquidity pools (CLPs) allow liquidity providers (LPs) to allocate their capital within a specific, narrow price range instead of the full 0 to infinity range. By concentrating capital around the current market price, LPs earn higher fees on their deployed capital.
While this doesn't eliminate impermanent loss, it increases the fee-earning potential significantly within the active range. This higher fee yield is intended to offset or exceed the potential impermanent loss, making the net outcome more favorable for the LP.
Glossar
Concentrated Liquidity
Allocation ⎊ Concentrated Liquidity represents a strategic deployment of capital within automated market makers, notably on decentralized exchanges, shifting from a uniform distribution to a targeted provision around specific price ranges.
Liquidity Providers
Capital ⎊ These entities supply the necessary assets to decentralized exchanges or automated market makers to facilitate continuous trading in crypto derivatives and options.
Capital Efficiency
Leverage ⎊ Capital efficiency, within cryptocurrency and derivatives, fundamentally represents the maximization of risk-adjusted returns relative to the capital at risk, demanding strategic asset allocation and precise risk parameterization.
Concentrated Liquidity Pools
Allocation ⎊ Concentrated Liquidity Pools represent a capital deployment strategy within automated market makers, shifting from uniform distribution to customized ranges, thereby enhancing capital efficiency.