How Does a Concentrated Liquidity Pool Differ in Its Impact on Impermanent Loss?
Concentrated liquidity pools allow LPs to allocate capital within a specific, narrow price range instead of the full 0 to infinity range. This increases capital efficiency and allows LPs to earn significantly higher fees within their chosen range.
However, if the token price moves outside of the LP's specified range, all of their liquidity converts to the less valuable asset, and they stop earning fees. This "out-of-range" event can significantly amplify the effect of impermanent loss compared to a full-range pool.
Glossar
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.
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.
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).
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.