What Is a 'Concentrated Liquidity' Model and How Does It Optimize Capital Efficiency? ⎊ Path

What Is a ‘Concentrated Liquidity’ Model and How Does It Optimize Capital Efficiency?

Concentrated Liquidity (CL) allows liquidity providers to allocate their capital to specific, narrow price ranges instead of across the entire 0 to infinity range. By concentrating capital where most trading occurs, the model simulates deeper liquidity within that range, significantly increasing capital efficiency.

This means LPs earn more fees with less capital, though it introduces the need for active management as the price moves out of the chosen range.

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Glossar

Narrow Price Ranges

Range ⎊ Within cryptocurrency derivatives and options trading, a narrow price range signifies a period of reduced volatility and consolidated trading activity, often characterized by minimal price fluctuation relative to historical norms.