Liquidity Range

A liquidity range (or price range) is the specific, bounded interval of prices within which a liquidity provider's (LP) capital is actively deployed in a concentrated liquidity automated market maker (AMM) like Uniswap V3. Unlike traditional AMMs where liquidity is distributed across all possible prices (from zero to infinity), concentrated liquidity allows LPs to allocate their funds to a custom price range where they believe most trading activity will occur. This concentration increases capital efficiency, as the same amount of capital provides deeper liquidity and earns more fees within the chosen band, but it also introduces impermanent loss risk if the market price exits the specified range.

The mechanics are governed by the constant product formula x * y = k, but applied only within the chosen range. When a liquidity provider sets a range—for example, from $1,800 to $2,200 for an ETH/USDC pool—their provided assets are only used for swaps while the market price is between those two values. If the price moves above $2,200, the position becomes entirely composed of ETH; if it falls below $1,800, it becomes entirely USDC. In either case, the position stops earning fees until the price re-enters the range, a state known as being out-of-range.

Setting an optimal liquidity range is a critical strategy for LPs. A narrow range (e.g., $1,950-$2,050) offers very high fee-earning potential and capital efficiency when the price is stable within it, but requires frequent, active management to avoid being out-of-range. A wide range (e.g., $1,000-$3,000) behaves more like a traditional V2 position, earning fees across a broader market movement but with lower fee density. This trade-off between potential fee income and risk management is central to concentrated liquidity provision.

From a protocol and trader perspective, liquidity ranges aggregate to form the overall liquidity distribution across the price curve. This creates a dynamic order book-like depth where liquidity is deepest around the current market price and thinner at extremes. This structure allows for greater capital efficiency for the system as a whole, enabling large trades to be executed with less slippage near the market price compared to earlier AMM designs, fundamentally changing the economics of decentralized market making.

A liquidity range (or price range) is the specific upper and lower price boundary, denoted by tick indices, within which a liquidity provider's (LP) deposited assets are utilized for swaps. Unlike traditional constant product AMMs where liquidity is distributed uniformly across all prices (0 to ∞), concentrated liquidity allows LPs to allocate their capital to a custom interval, such as $1,500 to $2,500 for an ETH/USDC pool. This concentration dramatically increases capital efficiency within the chosen band, allowing the pool to offer deeper liquidity and lower slippage for trades occurring within that range, using the same total value locked.

The mechanism is governed by a bonding curve that only exists within the specified range. When the market price moves within an LP's active range, both assets in the pair are used for trading. If the price exits the range, the position becomes composed entirely of one asset (e.g., only ETH if price falls below the range, or only USDC if price rises above it) and ceases to earn fees until the price re-enters. This introduces impermanent loss dynamics that are magnified but also more predictable, as LPs can tailor their risk to specific market expectations.

Setting the range involves strategic trade-offs. A narrow range offers the highest fee-earning potential and capital efficiency when price is stable within it, but carries a higher risk of the price moving out and the position becoming inactive. A wider range provides more protection against market movement and collects fees over a larger price spectrum, but with lower efficiency per dollar deposited. Advanced strategies involve dynamic range adjustment or using multiple positions to create a laddered liquidity profile across different price zones.

In a concentrated liquidity AMM like Uniswap V3, a liquidity range is a bounded price interval, defined by a lower tick (P_low) and an upper tick (P_high), within which a liquidity provider's (LP) capital is active and earns trading fees. Visualizing this range is crucial for understanding capital efficiency and impermanent loss exposure. Unlike traditional AMMs where liquidity is distributed uniformly across the entire price curve from 0 to ∞, concentrated liquidity confines capital to a specific segment, magnifying its impact and potential fee earnings within that band.

Graphically, the liquidity range is represented as a rectangle on a price-liquidity chart, where the x-axis is price and the y-axis is the amount of liquidity (L). The rectangle's width spans from P_low to P_high, and its height represents the constant depth of liquidity provided. The AMM's bonding curve is a hyperbola, but within this specific range, it appears as a straight line connecting the two price bounds. All trades that execute within this price interval interact with the LP's pooled assets, drawing from one token reserve and adding to the other until the price moves outside the range, at which point the position becomes composed entirely of a single asset.

The visualization helps LPs strategize their positions. A narrow range (e.g., $1,000 - $1,100 for ETH/USDC) offers higher fee-earning density but requires frequent, active management as the price is more likely to exit the range, converting the position to a single token. A wide range (e.g., $500 - $2,000) provides a passive, "set-and-forget" exposure more akin to V2 liquidity but with lower capital efficiency. The chosen range directly dictates the portfolio's behavior, acting as a customizable automated trading strategy that sells one asset as its price rises and buys it back as the price falls, all within the predefined bounds.