How Does a Concentrated Liquidity Pool Modify the Constant Product Formula’s Impact?

Concentrated liquidity pools (CLPs) allow LPs to allocate their capital within a specific price range, rather than across the entire $(0, infty)$ range. This means the $x y = k$ formula is only active within the chosen range.

This greatly increases capital efficiency, as the liquidity is concentrated where most trading occurs. However, it also increases the LP's exposure to impermanent loss outside their range.