Concentrated Liquidity
A deep dive into V3 and V4 concentrated liquidity mechanics and strategies.
Concept Overview
Concentrated liquidity allows you to provide liquidity within a specific price range, rather than from 0 to infinity.
Traditional AMM (V2)
Price: 0 ──────────────────────────────────────────────── ∞
Liquidity: |═══════════════════════════════════════════|
All liquidity across all prices
Concentrated Liquidity (V3)
Price: 0 ──────────●──────────────────────●────────────── ∞
Liquidity: ╔═══════════════════╗
Only this range earns fees
Key Terms
Ticks
Ticks are discrete price points in V3:
- Each tick represents a specific price
- Spacing depends on fee tier
- Provide granularity for range orders
Fee Tiers
| Tier | Tick Spacing | Use Case |
|---|---|---|
| 0.01% | 1 | Stablecoins |
| 0.05% | 10 | Similar assets |
| 0.30% | 60 | Standard pairs |
| 1.00% | 200 | Exotic pairs |
| 10.00% | 2000 | Volatile pairs |
Position
A position is your liquidity commitment:
- Has a token pair
- Has a fee tier
- Has a price range
- Tracks accrued fees
Creating a Position
Basic Mode
- Select V3 mode
- Choose token pair
- Choose fee tier
- Enter amounts
- Select price range
- Review APR
- Add liquidity
Price Range Selection
Full Range
- Entire price spectrum
- Like V2
- Lower returns but always in range
Custom Range
Determine your range:
Lower Bound = Current Price × (1 - Range%)
Upper Bound = Current Price × (1 + Range%)
Examples at $1.00:
| Range | Lower | Upper |
|---|---|---|
| ±10% | $0.90 | $1.10 |
| ±25% | $0.75 | $1.25 |
| ±50% | $0.50 | $1.50 |
The Math
Concentration Multiplier
Your effective TVL increases with concentration:
Multiplier = (Upper - Lower) / (Upper × Lower - Lower × Lower)
At 10x concentration:
- Your $100 acts like $1,000
- You earn fees on $1,000
- But only when price is in range
Fee Calculation
Fees earned within range:
Fees = (Volume in Range × Fee Tier) × (Your Liquidity / Total in Range)
Strategies
Wide Range (Conservative)
- Range: ±50% or more
- Risk: Low, price likely in range
- Returns: Lower than narrow range
Narrow Range (Aggressive)
- Range: ±5% or less
- Risk: High, easy to exit range
- Returns: Much higher when in range
Active Management
- Monitor price daily
- Adjust range as price moves
- Collect fees regularly
- Re-deposit when out of range
Pool Health
The interface shows pool health:
| Status | Meaning | Action |
|---|---|---|
| Green | In range | Continue |
| Yellow | Near edge | Consider adjusting |
| Red | Out of range | Must adjust |
Impermanent Loss
In Range
When price stays in range:
- Earn fees on full concentration
- Impermanent loss is manageable
Out of Range
When price exits range:
- Stop earning fees
- Impermanent loss increases
- Consider adjusting range
Best Practices
- Start Wide - Use ±25% for first position
- Monitor - Check position daily
- Adjust - Move range with price
- Collect - Claim fees regularly
- Diversify - Multiple positions
Advanced Tips
Multiple Positions
Create multiple positions:
- One wide for stability
- One narrow for returns
- One at current price
Rebalancing
Move position as price moves:
- Collect fees
- Remove liquidity
- Add new position with new range
Conclusion
Concentrated liquidity is powerful but requires:
- Understanding of mechanics
- Active monitoring
- Willingness to adjust positions
Start with conservative ranges and graduate to aggressive strategies as you learn.
V4 and Concentrated Liquidity
V4 pools also use concentrated liquidity mechanics, similar to V3. The key difference is that V4 pools support hooks — smart contracts that can execute custom logic before/after swaps or liquidity changes. Some hooks may automatically rebalance positions, collect additional rewards, or adjust fees dynamically.
When providing V4 liquidity, always review the hook contract to understand its behavior.