What Are the Game-Theoretic Implications of Concentrated Liquidity on Overall Market Stability and Liquidity Fragmentation?

Concentrated liquidity introduces complex game-theoretic dynamics. It can lead to liquidity fragmentation, as providers place capital in thousands of unique, narrow price ranges, making overall market depth less predictable.

This can cause higher price volatility when large trades push the price across multiple under-funded tick ranges. It also creates a competitive environment where LPs constantly adjust their narrow ranges to capture the most fees, a practice known as "just-in-time" liquidity, which can further exacerbate volatility and potentially centralize liquidity provision to more sophisticated actors.