Concentrated Liquidity vs Full Range Liquidity

Targeted capital allocation: LPs concentrate funds within a specific price range (e.g., ±5% around current price). This can provide 100-400x higher fees per dollar deposited compared to full-range pools for the same volume. This matters for professional market makers and high-TVL pairs (like ETH/USDC) where maximizing yield on idle capital is critical.

Higher, more complex risk: If the price moves outside your set range, your liquidity becomes inactive and earns zero fees, while still exposed to full divergence loss. Requires active management or sophisticated tools like Arrakis Finance or Gamma Strategies for rebalancing. This matters for volatile or trending assets where predicting a stable range is difficult.

Set-and-forget strategy: LPs deposit across the entire price curve (0 to ∞), as in Uniswap V2 or SushiSwap. Provides continuous fee earning and requires no active management. This matters for long-term holders of paired assets (e.g., ETH/DAI) who want passive yield and full price exposure without monitoring.

Low fee yield per capital: Most capital sits at price extremes where trades rarely occur. For stable pairs like USDC/USDT, over 99% of liquidity is never utilized. This matters for large-scale LPs and protocols where opportunity cost on locked capital is a primary concern, making it unsuitable for high-volume, narrow-range trading.

Higher capital efficiency: LPs concentrate funds within a specific price range (e.g., ±5% around current price). This can provide up to 4000x more liquidity per unit of capital than FRL for that range, as seen in Uniswap V3 pools. This matters for high-volume, stable pairs (e.g., ETH/USDC) where minimizing slippage for traders is critical.

Higher potential fee yield: By focusing liquidity where most trades occur, LPs can earn more fees per dollar deposited. This matters for active, sophisticated LPs willing to manage positions, especially in volatile or trending markets where they can capture fees from repeated price oscillations within their range.

Passive, set-and-forget management: LPs deposit equal value of both assets across the entire price curve (0 to ∞). This eliminates the risk of impermanent loss from range divergence and requires no active management. This matters for long-term holders of both assets in a pair (e.g., ETH/BTC) or for protocols like Curve Finance's stable pools where prices are designed to be stable.

Predictable, linear fee accrual: Fees are earned proportionally from all trades, regardless of price movement. Returns are more stable and easier to model. This matters for institutional LPs and DAO treasuries (e.g., Aave Treasury's Uniswap V2 positions) that prioritize capital preservation and predictable yield over maximizing APY.

Requires constant monitoring and rebalancing: LPs must actively manage price ranges, incurring gas fees for adjustments. Out-of-range liquidity earns zero fees. This matters for retail LPs without automation tools (like Gamma or Arrakis) or in highly volatile assets where being wrong on the range leads to significant opportunity cost.

Capital is spread thinly across unused price ranges: Most liquidity sits at prices where trades rarely occur (e.g., ETH at $1). This results in higher slippage for traders and lower fee yield per dollar for LPs. This matters for new or illiquid token pairs where providing deep liquidity at all prices is necessary for bootstrapping, despite the inefficiency.

Higher capital efficiency: LPs can concentrate capital within a custom price range (e.g., ±10% around current price). This can generate up to 4000x more fee revenue per unit of capital than full-range pools for stablecoin pairs. This matters for professional market makers and large LPs seeking optimal yield on volatile or stable assets.

Active risk management: LPs can define a price range where they are comfortable providing liquidity, reducing exposure to impermanent loss (IL) outside that band. This matters for informed LPs who have a directional view on an asset's price stability (e.g., ETH staking derivatives) and want to hedge volatility.

Passive, set-and-forget strategy: LPs deposit tokens in a 50/50 ratio across the entire price curve (0 to ∞). This provides predictable, linear fee accrual and requires no active management. This matters for retail LPs, long-term holders, and protocols like Balancer or Curve's 2pool where simplicity and deep baseline liquidity are paramount.

Superior price stability for new assets: Provides continuous liquidity across all prices, which is critical for smoothing volatility during extreme market moves and supporting the price discovery of new tokens. This matters for protocol treasuries and DAOs providing foundational liquidity for governance tokens on Uniswap v2 or SushiSwap.