CONCENTRATED LIQUIDITY

TLDR: Concentrated Liquidity requires management

When you provide liquidity, you are concentrating your tokens over a fixed price range that you set. However, the price of a token is never fixed. Tokens move up and down as traders buy and sell them. The prices in a liquidity pool are determined by market buyers and sellers. As this happens, the active bin (which represents the token price) will move up and down, exchanging liquidity in the bin as it moves.

As a liquidity provider, you earn a share of fees from this trading activity because your liquidity is being used for swaps. Therefore, your goal as a concentrated liquidity provider is to deploy your liquidity within the range where the trading activity is occurring.

If the price of a token moves out of your range, you might need to withdraw and rebalance your liquidity. The video below shows this movement in action.

Price Movement in a Liquidity Book Pool ⬇️