How Does a “Concentrated Liquidity” Model Affect Liquidation Price Impact?
Concentrated liquidity allows LPs to allocate their capital within a specific, narrow price range. This creates deep liquidity in that range, reducing slippage for trades within it.
However, if a large liquidation pushes the price outside the concentrated range, the liquidity instantly becomes shallow, leading to massive price impact and accelerating the death spiral.
Glossar
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.
Deep Liquidity
Depth ⎊ Deep liquidity, within cryptocurrency and derivatives markets, signifies a substantial volume of buy and sell orders clustered closely around the current market price, facilitating large transactions with minimal price impact.
Concentrated Liquidity Model
Model ⎊ The Concentrated Liquidity Model utilizes algorithms to allocate deposited capital across discrete, user-defined price segments within an automated market maker structure.
Liquidation Price
Trigger ⎊ The Liquidation Price is the specific market price level at which a trader's margin equity falls to the maintenance margin threshold, causing the exchange or protocol to automatically close the leveraged position to prevent the account balance from falling into negative territory.
Price Impact
Execution Cost ⎊ Price Impact quantifies the immediate change in an asset's market price caused solely by the execution of a single trade, reflecting the inverse of available liquidity at the point of execution.