Price Ranges

How Do Liquidity Price Ranges Work?

In concentrated liquidity market maker (CLMM) pools, users can define specific price ranges within which they provide liquidity. Liquidity providers (LPs) earn fees based on their share of liquidity at the current market price, creating a strong incentive to actively manage positions to ensure the price remains within their selected range.

If the market price moves outside an LP's chosen range, their position becomes inactive, ceasing to earn fees. Additionally, LPs may face increased impermanent loss. Similar to standard AMM pools, when the price of a base token rises, traders exchange the quote token for the base token, leaving the pool—and the LP—with more of the quote token and less of the base token.

In CLMMs, this process is more concentrated within the selected price range, leading to accelerated effects:

• If the price drops below the minimum of the selected range, the LP's position will consist entirely of the base token.

• If the price exceeds the maximum of the range, the LP's position will fully convert to the quote token.

This dynamic allows LPs to have greater control over their liquidity and the potential for higher returns but requires careful monitoring to minimize the risk of being out of range and missing fee opportunities.