Price Ranges

How Do Liquidity Price Ranges Work?

In concentrated liquidity market maker (CLMM) pools, users set specific price ranges where they provide liquidity. Liquidity providers (LPs) earn fees based on their share of liquidity at the current market price. This encourages LPs to actively manage their positions to keep the price within their selected range.

If the market price moves outside an LP's chosen range, their position stops earning fees and becomes inactive. LPs may also face higher impermanent loss. Similar to traditional AMM pools, when the base token price rises, traders swap the quote token for the base token, leaving the pool—and the LP—with more of the quote token and less of the base token.

In CLMMs, these effects happen faster within the chosen range:

• If the price falls below the minimum range, the LP’s position becomes fully composed of the base token.

• If the price rises above the maximum range, the LP’s position fully converts to the quote token.

This setup gives LPs more control over their liquidity and the chance for higher returns. However, it also requires careful monitoring to avoid being out of range and missing out on fees.