Concentrated Liquidity
A DeFi mechanism allowing liquidity providers to allocate capital within specific price ranges for higher efficiency.
What is Concentrated Liquidity?
Introduced in Uniswap v3, concentrated liquidity lets providers set custom price bounds, like $4,400-$4,800 for ETH/USDC, concentrating capital where trading occurs and earning up to 400x more fees than uniform models. This mimics limit orders, deepening liquidity at key levels.
Benefits include reduced capital requirements; a $1 million position can provide equivalent depth to $4 billion in v2. However, it amplifies risks if prices exit the range, rendering positions inactive.
Adopted by ZetaChain and Pontem, it supports multi-asset pools and has facilitated $750 billion in event volume on v3 by 2023.
Related Terms
Liquidity (DEX)
Liquidity on a decentralized exchange (DEX) refers to the pool of digital assets locked in smart contracts, enabling seamless token trading by ensuring sufficient supply and demand for transactions.
Rollup Validity Proof
A security mechanism for Layer 2 solutions that verifies batched transactions off-chain using cryptographic proofs submitted to the main blockchain.
Liquidation
The process in DeFi where assets from an under-collateralized loan are sold to repay the borrowed amount, typically triggered automatically by smart contracts when collateral value falls below a required threshold.
OCO Order
A paired order where executing one automatically cancels the other.
Merkle Tree
A binary tree data structure used to efficiently verify and summarize large sets of data, such as transactions in a blockchain.
Wrapped Tokens
Wrapped tokens are digital assets on one blockchain that represent a 1:1 pegged equivalent of an asset from another blockchain or the same chain, enabling cross-chain compatibility or enhanced functionality.