Active and Inactive Liquidity

As asset prices change, they may move beyond the price range defined by LPs. When this happens, liquidity for that position becomes inactive, and fees stop accumulating until the price returns to the defined range.

When prices shift, LPs accumulate more of one asset as trades occur. This continues until the position holds only one asset. However, unlike traditional models, concentrated liquidity allows LPs to avoid extremes (e.g., 0 or ∞) by setting precise price intervals. Once the price reenters the defined range, the position becomes active again, and LPs resume earning fees.

LPs can also create multiple positions with different price ranges, offering flexibility to spread liquidity across various ranges. This approach helps maximize earnings while keeping liquidity active as often as possible.

Concentrated liquidity provides LPs with detailed control over their strategies, letting them focus liquidity where it’s most effective. This supports higher returns and promotes a more efficient trading system overall.