What is concentrated liquidity?

In Uniswap V2, your liquidity was spread across every price from 0 to infinity — most of it never touched. Uniswap V3 introduced concentrated liquidity: you choose a price range [Pa, Pb], and your capital only backs trades inside it.

The payoff is capital efficiency. The same deposit inside a ±10% band provides roughly 20× the depth of a full-range position, so it earns roughly 20× the fees — while price stays in the band.

The cost is that outside your range, the position converts entirely into the less valuable token and earns nothing. Concentration is leverage on both fees and impermanent loss.

Educational content — not financial advice.