Active Liquidity

Another feature of Concentrated Liquidity pools is this idea of active liquidity. When an asset is traded outside of the price range set by liquidity providers (LP) it effectively results in the liquidity being removed is converted entirely to one asset. This also means that the LP will not earn any fees while trading occurs outside of the defined range. The liquidity provider than has the option to "actively" change the range with which their liquidity is available to meet the new thresholds that the asset prices are operating in. The liquidity provider alternatively could wait for the price of the asset to return back to its originally defined range but by taking an active role in establishing new bounds on unexpected price movements the liquidity provider could potentially capture all or most of the fees generated within the new range before others catch on.

Liquidity providers may also choose to distribute their capital in unique ways across multiple price ranges for the same asset pair. For instance they could provide $5000 for a $VAPE/USDC pool between the $.50-$.85 range, $500 for a $VAPE/USDC pair between $.35-$1.00, and $100 for a $VAPE/USDC pair between $.10-$1.25. In this way they could allow most of their capital to work in a highly efficient manner since that is where the majority of trades (hypothetically) are made but would still be able to catch fees for swaps made outside of the more probable price ranges.

This is all possible because of the way that Concentrated Liquidity pools are designed. Instead of having a single pool that all providers contribute to concentrated liquidity uses NFTs to represent a pool for an asset pair within a specified range for a specific liquidity provider. Smart contracts then aggregate the liquidity across these individual pools.

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