Concentrated liquidity is an automated market maker design in which a liquidity provider chooses the price range where a position supplies trading liquidity. Uniswap v3 introduced this approach, and v4 retains its core mechanism. Capital can support deeper trading within a selected interval instead of being spread across the entire possible price curve.
When a position is active
A position earns its share of swap fees while its liquidity is active at the traded price, subject to the pool’s rules. As swaps move the price, the position’s token composition changes.
For example, an ETH position spanning 1,800–2,200 units of its quote token is outside its range at 2,300. In the standard concentrated-liquidity mechanism, its principal then consists of one asset and stops earning swap fees until the price returns or the position is changed. Previously earned fees are a separate balance.
More precision, more tradeoffs
A narrower interval can increase capital efficiency but is easier for price movements to leave. Repositioning can require transactions, gas, and changes to token holdings.
Providers still face price exposure and impermanent loss relative to holding the original assets. Fees may offset these effects, but need not do so. Concentration therefore does not guarantee higher net returns or eliminate smart-contract risk.