Tick

In a concentrated liquidity AMM, a tick is a discrete price point on a predefined price curve, analogous to the ticks on a number line. Unlike traditional constant-product AMMs where liquidity is distributed uniformly across an infinite price range (0, ∞), liquidity providers (LPs) in systems like Uniswap V3 allocate their capital to specific, contiguous tick ranges. Each tick has an associated tick index, which maps directly to a specific price via the formula price = 1.0001^{tickIndex}. This granular structure allows LPs to concentrate capital around expected trading prices, dramatically increasing capital efficiency.

The tick spacing is a protocol-defined parameter (e.g., 1, 10, 60, or 200 ticks) that determines how far apart active ticks can be for a given trading pair. A smaller spacing allows for more precise liquidity positioning but increases gas costs for swaps that cross multiple ticks. When a swap moves the market price across a tick boundary, the pool's active liquidity changes, as the liquidity provided in the now-out-of-range tick is no longer used. This mechanism ensures that only the most relevant liquidity at the current price is utilized for trades, minimizing slippage.

From a developer's perspective, ticks are the fundamental state variable for tracking liquidity. The AMM smart contract maintains a ticks mapping, storing for each initialized tick the amounts of liquidity that must be added or removed when the price crosses it. This is managed via the tickBitmap, a gas-efficient bitmap that tracks which ticks are initialized. Understanding ticks is essential for building advanced DeFi applications, optimizing LP strategies, and analyzing on-chain liquidity distribution, as they form the atomic building blocks of modern AMM pricing and fee accrual.

In an Automated Market Maker (AMM), a tick is the smallest, discrete price interval at which liquidity can be provided, representing a fixed point on a logarithmic price scale. Unlike earlier AMMs where liquidity was distributed uniformly across an infinite price range, the tick system allows liquidity providers (LPs) to concentrate their capital within specific, bounded price ranges defined by tick indices. Each tick corresponds to a 0.01% (1 basis point) price movement by default in pools like Uniswap V3, calculated as a 1.0001 multiplier to the square root of the price ratio.

The system is defined by a tick spacing parameter, which determines which ticks are active for a given pool. For example, a 0.3% fee tier pool might have a tick spacing of 60, meaning liquidity can only be placed on ticks that are multiples of 60 (e.g., ticks 0, 60, 120). This spacing creates granular but manageable liquidity "buckets," reducing gas costs and computational complexity. When a trade moves the price from one tick to another, the AMM's liquidity depth and the applicable exchange rate change accordingly, as different LPs' positions become active or inactive.

For a liquidity provider, selecting a tick range is a critical decision. By depositing assets between a lower tick and an upper tick, an LP's capital is only used for swaps occurring within that price interval. This concentration allows for greater capital efficiency and higher fee earnings per unit of capital while the price remains in-range, but it also introduces the risk of impermanent loss if the price moves outside the chosen range, rendering the position inactive and non-earning. The tick system thus transforms liquidity provision from a passive, blanket coverage into an active strategy of price range prediction.

In a concentrated liquidity AMM like Uniswap V3, the price continuum is discretized into fixed intervals called ticks. Tick spacing is the fixed distance between these allowable price ticks, set as a protocol parameter per pool (e.g., 1, 10, 100, or 200 basis points). This spacing determines the granularity of price points where liquidity providers (LPs) can deploy capital. A smaller spacing allows for finer, more precise liquidity concentration around the current price, while a larger spacing reduces the number of possible positions, simplifying management and lowering gas costs for swaps and liquidity adjustments.

The choice of tick spacing creates a fundamental trade-off between capital efficiency and gas efficiency. For stablecoin pairs (e.g., USDC/USDT), a tight spacing of 1 basis point is common, as prices fluctuate within a narrow corridor, enabling highly efficient use of capital. For volatile asset pairs (e.g., ETH/DAI), a wider spacing like 60 or 200 basis points is typical, as the price range is broader; this reduces the frequency of positions falling out of range and minimizes the gas overhead from managing numerous, closely-packed ticks. The spacing is immutable once a pool is created, making it a critical design decision for pool creators.

From a technical perspective, tick spacing is implemented via a tick index. The price at tick i is calculated as price = 1.0001^i. The spacing dictates which ticks are initializable; for a spacing of 10, only ticks divisible by 10 (..., -20, -10, 0, 10, 20, ...) can hold liquidity. This structure allows the AMM to track liquidity and fees per tick bitmap, optimizing on-chain computation. The granularity defined by spacing directly influences slippage; denser ticks provide more incremental price steps, generally leading to lower slippage for trades that move the price across multiple ticks.

In the context of decentralized exchanges (DEXs) like Uniswap V3, a tick is the smallest, discrete price interval on a concentrated liquidity price curve. The system uses an integer tick index to represent these intervals, where the actual price is derived from the formula price = 1.0001^i, with i being the tick index. This logarithmic scaling allows the protocol to represent an enormous range of prices with high granularity while using efficient integer math on-chain, avoiding computationally expensive floating-point or fractional numbers.

The choice of base 1.0001 is a critical engineering trade-off. It provides a 0.01% minimum price movement (or tick spacing) when the index changes by 1, which is sufficiently granular for most assets. This base creates a geometric progression where prices are stored as sqrtPriceX96—a fixed-point representation of the square root of the price, encoded in 128.128-bit (Q128.128) format with 96 bits of integer precision. This representation optimizes the calculation of liquidity and token amounts within a position's defined tick range.

Tick indexing enables concentrated liquidity, where liquidity providers (LPs) can allocate capital to specific price intervals between a lower tick and an upper tick. The protocol only utilizes the deposited liquidity when the current market price moves within this chosen range. This system dramatically increases capital efficiency compared to earlier AMM designs, as liquidity is concentrated around the current price rather than spread evenly across the entire (0, ∞) price spectrum.

Computationally, crossing a tick boundary triggers a state update and may involve the collection of accrued swap fees. The protocol maintains a global bitmap and tick information mapping to track which ticks are "initialized" (have liquidity attached). When a swap moves the price across an initialized tick, the liquidity active in the pool is updated, and the fee growth outside the tick is recorded, which is essential for calculating an LP's share of fees when they withdraw their position.