How Do Concentrated Liquidity Positions in AMMs like Uniswap V3 Alter the Risk of Impermanent Loss?

Concentrated liquidity allows providers to allocate capital to a specific price range, increasing capital efficiency and potential fee earnings. However, this concentration magnifies the risk of impermanent loss.

If the token's price moves outside the provider's chosen range, their position becomes inactive, earning no fees, and consists entirely of the less valuable asset. This makes the position highly sensitive to price volatility, as smaller price movements can lead to significant, amplified impermanent loss compared to traditional full-range liquidity positions.