Tick (Tick Spacing)

In automated market maker (AMM) design, a tick is the smallest discrete price interval to which liquidity can be allocated, analogous to the tick size on a traditional order book. Tick spacing is the fixed multiple that determines which ticks are usable for liquidity provision, setting the minimum granularity between allowed price ranges. For example, with a tick spacing of 10, liquidity can only be placed on ticks 0, 10, 20, and so on, not on ticks 1-9. This design creates a trade-off: smaller spacing allows for more precise, capital-efficient positions but increases gas costs for swaps due to more frequent crossing of liquidity ticks.

The tick system is built on a logarithmic price scale. The price P at a tick index i is defined by the formula P = 1.0001^i. This ensures that the percentage change in price between adjacent ticks is constant (approximately 0.01% or 1 basis point). Tick spacing multiplies this index, so with a spacing of 10, the price multiplies by 1.0001^10 between active ticks. Different pools have standardized spacings (e.g., 1 for stablecoin pairs, 60 for volatile pairs) to balance precision against computational load. This structure allows liquidity providers (LPs) to define a price range by selecting a lower tick and an upper tick where their capital is active.

The choice of tick spacing is a critical protocol-level parameter that directly impacts market microstructure. Tighter spacing concentrates liquidity near the market price, reducing slippage for traders but potentially fragmenting liquidity across many ticks. Wider spacing consolidates liquidity into fewer, deeper price points, which can be more gas-efficient for large trades that cross multiple ticks. This parameter is often set by the pool creator based on the asset pair's expected volatility and is immutable once the pool is deployed. Understanding ticks is essential for calculating impermanent loss, fee accrual, and the precise behavior of liquidity positions within a defined price corridor.

A tick is the smallest discrete unit of price movement on a concentrated liquidity automated market maker (AMM). In systems like Uniswap V3, the entire price continuum is divided into a finite set of ticks, each representing a specific price point defined by the formula p(i) = 1.0001^i. This creates a fixed, non-overlapping grid where liquidity can be allocated, replacing the continuous price curve of earlier AMM designs.

Tick spacing is a protocol-defined parameter that determines which ticks are eligible for liquidity provision. It is a multiple (e.g., 1, 10, 100) that restricts liquidity positions to every Nth tick. A higher spacing (like 100 for a stablecoin pair) creates wider price ranges between active ticks, reducing gas costs for swaps and position management but decreasing capital efficiency. A lower spacing (like 1 for a volatile pair) allows for extremely precise range orders, maximizing fee-earning potential at the cost of more frequent, gas-intensive tick crossings.

The choice of tick spacing is a critical trade-off for liquidity providers (LPs). It directly impacts capital efficiency—how closely liquidity concentrates around the current price—and gas efficiency, as each swap that crosses an initialized tick incurs a gas cost. Protocols set a default spacing per fee tier (e.g., 0.05% fee pools use tighter spacing than 1% pools), but the core innovation is that LPs can choose their own price range bounded by these spaced ticks, unlike the full-range requirement of constant product AMMs.

From a technical perspective, crossing a tick triggers a state update in the AMM's smart contract. The contract must calculate and distribute accumulated fees to LPs whose range includes that tick, and update the global liquidity variable L. This mechanism ensures that swap execution remains mathematically consistent and that fees are accurately allocated, even as price moves across thousands of potential ticks in the system.

In a concentrated liquidity AMM like Uniswap V3, a tick is the smallest discrete price interval at which liquidity can be provided, analogous to the tick marks on a price chart. Unlike the continuous price curve of earlier AMMs, the price space is divided into a series of these fixed points, each representing a specific exchange rate between two assets. The tick spacing determines the granularity of this grid by defining how many ticks must separate active liquidity positions, directly impacting capital efficiency and gas costs for swaps and liquidity management.

Liquidity is not spread uniformly across the entire price range but is instead concentrated within a specific upper and lower tick boundary chosen by the liquidity provider (LP). When the market price moves into this range, the provided capital becomes active and earns trading fees. If the price moves outside the range, that liquidity becomes inactive and is converted entirely into one of the two assets. This mechanism allows LPs to act like range order providers in a traditional order book, targeting their capital to specific price zones where they anticipate the most trading activity.

Visualizing this, each tick acts as a checkpoint where the liquidity depth—the amount of assets available for trading—can change. A liquidity position creates a "liquidity rectangle" on the price chart, with its height representing the amount of capital and its width defined by the chosen ticks. The aggregate of all active positions forms a liquidity distribution curve, which dictates the actual slippage and price impact for traders. Dense liquidity around the current price creates a shallow curve with low slippage, while sparse liquidity leads to steeper price movements.

The choice of tick spacing is a critical parameter set by the pool's fee tier. A tighter spacing (e.g., 1 basis point) allows for extremely precise capital allocation, maximizing fee earnings for LPs who can accurately predict price movement, but it increases the computational complexity and gas costs for crossing multiple ticks during a swap. A wider spacing (e.g., 60 basis points) reduces gas costs and simplifies position management but can lead to lower capital efficiency, as liquidity is spread over a broader, less-targeted price range.