What Is Concentrated Liquidity?
Concentrated liquidity, pioneered by Uniswap V3, allows liquidity providers to allocate their capital to a specific price range rather than across the entire 0-to-infinity spectrum. If ETH is trading at $3,000 and you expect it to stay between $2,500 and $3,500, you can concentrate your liquidity in that range — earning fees as if you had 5-10x more capital deployed.
How Concentrated Liquidity Works
In a standard AMM (Uniswap V2), $10,000 of liquidity is spread across all prices. In concentrated liquidity, the same $10,000 focused on a 20% range provides the same depth as $50,000+ in a standard pool. This dramatically increases fee earnings per dollar deployed. The trade-off: if price moves outside your range, your liquidity earns zero fees and you're left holding whichever asset has depreciated more.
Why It Matters for Traders
Concentrated liquidity transforms LP from a passive strategy into an active one — you must monitor price and adjust your range to stay in the fee-earning zone. For professional LPs, this active management generates significantly higher returns than passive full-range provision. Tools that automatically rebalance concentrated positions (like Arrakis, Gamma) make the strategy more accessible.
