What Is a Concentrated Liquidity Pool and How Does It Affect Capital Efficiency?

A concentrated liquidity pool allows a liquidity provider (LP) to allocate their capital to specific, narrow price ranges instead of the entire 0 to infinity range. This greatly boosts capital efficiency because the deposited assets are actively used for trading within the most frequent price range.

However, it also increases the risk of impermanent loss and requires active management, as the LP earns no fees if the price moves outside their chosen range.