What Is the Trade-off between Capital Efficiency and Impermanent Loss Risk in Concentrated Liquidity?

Concentrated liquidity significantly increases capital efficiency because the LP's capital is actively used for trades within the narrow, most common price range. This earns higher fees on less capital.

The trade-off is amplified impermanent loss risk. If the price moves outside the range, the LP stops earning fees and is left with 100% of the less valuable asset, realizing a much greater loss than if they had provided liquidity across the full range.

Higher efficiency means higher potential returns but also higher risk.