How Does Providing Liquidity in a Narrow Price Range Affect the Risk of Impermanent Loss?

Providing liquidity in a narrow price range, as in concentrated liquidity AMMs, increases the exposure to impermanent loss if the price moves outside that range. Within the range, the LP earns significantly higher fees, which is intended to offset the loss.

However, if the price exits the range, the LP's position is entirely converted into the less valuable asset, realizing the maximum potential impermanent loss for that price movement. The strategy is high-risk, high-reward; it maximizes fee generation but also maximizes the risk of realizing a loss.