Crypto glossary
Concentrated liquidity
Concentrated liquidity lets AMM liquidity providers place their funds within a chosen price range instead of across all prices, earning more fees per dollar.
In early AMMs, deposits were spread evenly across every possible price from zero to infinity, so most of the capital sat idle. Concentrated liquidity, introduced by Uniswap v3 in May 2021, lets a provider choose a range, for example ETH between $2,500 and $3,500. Within that range the same capital offers much deeper liquidity and collects a larger share of trading fees.
Each position is unique, so Uniswap v3 represents it as an NFT rather than a standard LP token. The model has since been adopted by many DEXs on other chains, and active managers and vaults rebalance ranges on behalf of users.
When the price leaves the chosen range, the position stops earning fees and ends up entirely in the less valuable asset. Narrow ranges earn more but amplify impermanent loss and need frequent, gas-consuming adjustments, so many passive providers end up underperforming simply holding.
Example
A provider who puts $10,000 in an ETH/USDC pool with a range of $2,800 to $3,200 earns fees only while ETH trades inside it; if ETH rises to $3,400, the position holds only USDC and earns nothing until the price returns.
