How Do Concentrated Liquidity Pools Modify the Constant Product Formula’s Impact?

Concentrated liquidity pools, like Uniswap V3, allow LPs to allocate capital within specific price ranges instead of the entire (0, infinity) range. This modification means the constant product formula is applied only within the chosen range.

This increases capital efficiency and fees for the LP in that range, but also increases the risk of impermanent loss if the price moves outside their chosen range.