# Concentrated Liquidity {% embed url="" %} Source: Finematics {% endembed %} ## Introduction The defining idea of Uniswap V3 that pioneered a new generation of AMMs is **concentrated liquidity**: liquidity that is allocated within a custom price range. In earlier versions, so-called Constant Function Market Makers, liquidity was distributed uniformly along the price curve between 0 and infinity. The previously uniform distribution allowed trading across the entire price interval (0, ∞) without any loss of liquidity. However, in many pools, the majority of the liquidity was never used. Consider stablecoin pairs, where the relative price of the two assets stays relatively constant. The liquidity outside the typical price range of a stablecoin pair is rarely touched. For example, the V2 DAI/USDC pair utilizes \~0.50% of the total available capital for trading between $0.99 and $1.01, the price range in which LPs would expect to see the most volume - and consequently earn the most fees. With V3, liquidity providers may concentrate their capital to smaller price intervals than (0, ∞). In a stablecoin/stablecoin pair, for example, an LP may choose to allocate capital solely to the 0.99 - 1.01 range. As a result, traders are offered deeper liquidity around the mid-price, and LPs earn more trading fees with their capital. We call liquidity concentrated to a finite interval a position. LPs may have many different positions per pool, creating individualized price curves that reflect the preferences of each LP. ## Active Liquidity As the price of an asset rises or falls, it may exit the price bounds that LPs have set in a position. When the price exits a position's interval, the position's liquidity is no longer active and no longer earns fees. As price moves in one direction, LPs gain more of the one asset as swappers demand the other, until their entire liquidity consists of only one asset. (In V2, we don't typically see this behavior because LPs rarely reach the upper or lower bound of the price of two assets, i.e., 0 and ∞). If the price ever re-enters the interval, the liquidity becomes active again, and in-range LPs begin earning fees once more. Importantly, LPs are free to create as many positions as they see fit, each with its own price interval. Concentrated liquidity serves as a mechanism to let the market decide what a sensible distribution of liquidity is, as rational LPs are incentivized to concentrate their liquidity while ensuring that their liquidity remains active. Source: [Uniswap's Gitbook](https://docs.uniswap.org/protocol/concepts/V3-overview/concentrated-liquidity) --- # Agent Instructions: Querying This Documentation If you need additional information that is not directly available in this page, you can query the documentation dynamically by asking a question. Perform an HTTP GET request on the current page URL with the `ask` query parameter: ``` GET https://lixir-finance.gitbook.io/lixir-doc/concentrated-liquidity.md?ask= ``` The question should be specific, self-contained, and written in natural language. The response will contain a direct answer to the question and relevant excerpts and sources from the documentation. Use this mechanism when the answer is not explicitly present in the current page, you need clarification or additional context, or you want to retrieve related documentation sections.