How Does a Concentrated Liquidity Pool Differ from a Standard AMM Pool?
Standard AMM pools spread liquidity evenly across the entire price range from zero to infinity. Concentrated liquidity pools (CLPs) allow LPs to allocate their capital to specific, narrow price ranges.
This makes the capital more efficient within that range, leading to higher fee generation for the LP when the asset price is within their chosen range. However, it also increases the risk of the price moving outside the range, causing 100% impermanent loss and zero fee earning.
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.
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 Pool
Protocol ⎊ A concentrated liquidity pool, within the context of cryptocurrency derivatives and options trading, represents a structural evolution from traditional Automated Market Makers (AMMs).
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.
Concentrated Liquidity Position
Mechanism ⎊ A concentrated liquidity position within automated market makers represents a strategic allocation of capital to a specific price range, differing from traditional liquidity provision by enabling capital efficiency.
Impermanent Loss
Exposure ⎊ Impermanent loss, a risk inherent in automated market maker (AMM) protocols and liquidity provision, arises from price divergence between assets deposited and their subsequent value upon withdrawal.