How Does Capital Efficiency Differ between a Standard AMM and a Concentrated Liquidity Pool?
Capital efficiency is significantly higher in a concentrated liquidity pool (CLP). In a standard AMM, capital is spread across the entire 0 to infinity price curve, meaning a large portion of the capital is inactive at any given time.
A CLP allows LPs to concentrate their capital into the most active trading range. This means the same amount of capital can facilitate a much larger volume of trades, generating higher fees and thus being more capital efficient than a standard AMM.
Glossar
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 capital at risk, a metric increasingly vital given regulatory constraints and market volatility.
Increased Capital Efficiency
Leverage ⎊ Increased capital efficiency within cryptocurrency, options, and derivatives markets fundamentally centers on maximizing position size relative to capital at risk.
High Capital Efficiency
Metric ⎊ High capital efficiency measures the effectiveness of capital deployment by comparing the volume of trades or generated fees against the total value locked (TVL) in a liquidity pool.
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.