Intro on Concentrated Liquidity

What is a CLMM?

Concentrated Liquidity Market Maker (CLMM) CLMM pools enable liquidity providers to choose a specific price range within which their liquidity is active for trades. This differs from constant product Automated Market Maker (AMM) pools, where liquidity is uniformly distributed along a price curve from 0 to ∞. For liquidity providers, the CLMM design allows for more efficient capital deployment and higher yields from trading fees. For traders, CLMMs enhance liquidity depth near the current price, resulting in better trade prices and reduced price impact on swaps.

The design of CLMMs allows capital to be allocated more efficiently for market making within a specific price range. However, users should be mindful that actively monitoring their positions and market fluctuations is essential to minimize the risk of increased impermanent loss.

How do liquidity price ranges work?

In CLMM pools, users can choose a specific price range within which to provide liquidity. Liquidity providers (LPs) earn fees proportional to their share of the liquidity at the current price within that range. This creates a strong incentive for LPs to actively manage their positions, ensuring that the current price remains within their selected price range, as this is when their liquidity is actively used and they can earn the most fees.

If price moves out of the selected price range, a position will no longer actively trade or earn fees and the LP may experience significant. In a standard AMM pool, if the price of a base token rises it means that users are trading the quote token for the base token. As such, the pool and LPs now have more of the quote token and less of the base token.

CLMMs work in the same manner, however this is accelerated within the selected price range. For example, if the price trades below the position's min price, the position will then be comprised of 100% base token. If price trades above the max price, the position will effectively sell the base token and then be 100% comprised of the quote token.

Continue to the next page to learn more about providing liquidity in concentrated pools!