Concentrated Liquidity Pools vs Full-Range Liquidity Pools

Targeted Capital Deployment: Liquidity is allocated to a specific price range (e.g., $1,800 - $2,200 for ETH). This allows LPs to achieve up to 4000x higher capital efficiency than full-range pools for the same depth. This matters for professional market makers and yield maximizers who can actively manage positions.

Concentrated Risk: While earning higher fees, LPs face amplified impermanent loss if the price exits their chosen range. Outside the range, assets are 100% exposed to the worse-performing asset. This matters for LPs who cannot actively monitor and rebalance positions, leading to potential capital erosion.

Passive, Broad Exposure: Liquidity is provided across the entire price curve (0 to ∞). This offers set-and-forget simplicity and guarantees fee earnings from all trades, regardless of volatility. This matters for long-term holders, new LPs, and protocols like Balancer or Curve (for stable pairs) where price stability is assumed.

Low Fee Yield per Capital: The majority of capital sits at price extremes where trades rarely occur. This results in significantly lower annual percentage yield (APY) for the same TVL compared to concentrated models. This matters for capital-constrained LPs seeking optimal returns, making it a poor fit for volatile or trending assets.

Specific advantage: LPs can allocate capital to specific price ranges, achieving up to 4000x higher capital efficiency for stablecoin pairs compared to full-range pools. This matters for professional market makers and large funds seeking to maximize fee yield per dollar deployed, especially for assets with low volatility (e.g., USDC/USDT).

Specific disadvantage: Requires constant monitoring and rebalancing as price moves out of the set range, leading to impermanent loss on both sides and potential zero fee accrual. This matters for passive LPs or long-term holders who cannot actively manage positions, increasing operational overhead and gas costs on networks like Ethereum Mainnet.

Specific advantage: Provides liquidity across the entire price curve (0 to ∞), eliminating the need for active range management. This matters for retail LPs and token projects seeking a simple, set-and-forget mechanism to bootstrap liquidity, as seen in Uniswap V2, SushiSwap, and most AMMs on L2s like Arbitrum.

Specific disadvantage: The majority of capital sits unused at extreme prices, drastically lowering fee yield per dollar. For a stable pair, over 99% of liquidity may never be utilized for trades. This matters for institutions and yield optimizers where ROI is critical, making it a poor fit for high-volume, narrow-range trading pairs.

Targeted capital allocation: LPs concentrate funds within a custom price range (e.g., ±10% around current price). This can provide up to 4000x higher capital efficiency than full-range pools for the same depth, as seen in Uniswap v3. This matters for professional market makers and protocols like Gamma Strategies that need to maximize fee yield per dollar deployed.

Active management for higher APR: By concentrating liquidity where most swaps occur, LPs capture a larger share of trading fees. This enables sophisticated strategies like range orders and integration with Arrakis Finance or Sommelier vaults for automated management. This matters for yield-optimizing LPs willing to actively manage or delegate position management.

Passive, set-and-forget exposure: LPs provide liquidity across the entire price curve (0 to ∞), as in Uniswap v2 or SushiSwap classic pools. This eliminates impermanent loss management and liquidity rebalancing. Fee yield is predictable and uniform. This matters for long-term holders and DAO treasuries (e.g., Lido's stETH/ETH pool) seeking simple, hands-off yield.

Superior deep liquidity: Funds are distributed across all prices, providing consistent liquidity for large, outlier trades. This results in lower slippage for swaps that move price significantly and protects against liquidity fragmentation. This matters for stablecoin pairs (USDC/USDT) and protocols like Curve (which uses a hybrid model) where minimal slippage is critical.

Active management overhead: LPs must monitor and adjust price ranges, facing 100% impermanent loss if the price moves outside their bracket. This requires tools like Panoptic for options hedging or trust in vault managers. This is a poor fit for retail LPs or anyone unable to consistently monitor positions.

Idle capital at most prices: The majority of funds are allocated to price ranges where trading rarely occurs (e.g., ETH at $1). This leads to low fee yield per dollar locked and dilutes overall returns. For a pool with high TVL but low volume, APRs can be negligible. This is suboptimal for capital-conscious institutions.