⚖️ Concentrated Liquidity AMMs (Uniswap v3 and friends)

[lingriiddd]

Implications on Capital Efficiency:

Traditional AMMs (Uniswap v2, Sushi) distribute liquidity evenly across the full price curve (0 → ∞). That means most liquidity is sitting idle in places where the asset pair is unlikely to trade.

With concentrated liquidity, LPs can provide liquidity within a specific price range (say, ETH/USDC between $2,000–$3,000). This compresses capital into a zone where it’s actually used, dramatically improving depth and slippage performance. In practice, you can get 5–20x more efficient use of capital.

Implications on Impermanent Loss (IL):

IL is magnified in concentrated ranges. If the market price exits your chosen range, you’re no longer earning fees, but you’re still exposed to the price move. You effectively become a passive limit order — your position gets “stuck” until the market comes back into range (or until you actively rebalance).

That means more active management is required. LPing shifts from a passive yield strategy (like in v2) toward something closer to market-making.

Skilled LPs can mitigate IL by actively adjusting ranges, but that introduces gas costs and risks of being out of range during volatile moves.

Bottom line: concentrated liquidity turns liquidity provision into a more professional, active-trading game. Retail LPs risk being outplayed by quant firms running bots that rebalance constantly.

[Nahid10]

@lingriiddd
This is the part most retail LPs underestimate: concentrated liquidity isn’t passive yield, it’s basically professional market-making. If you don’t actively monitor your ranges, you’re just giving arbitrage bots free money.

[kelson10]

@lingriiddd
Capital efficiency sounds sexy (“20x more efficient!”), but the tradeoff is amplified impermanent loss risk. You can earn more fees in range, but once price leaves, you’re stuck holding the weaker asset until you rebalance — which itself costs gas + timing risk.