Active Liquidity

Since users can define a finite price range for their liquidity positions, asset price fluctuations may cause the market price to move outside of that range. When this occurs, the liquidity in that position becomes inactive and no longer earns fees until the price re-enters the defined range.

As the price of a trading pair shifts in one direction, liquidity providers (LPs) accumulate more of one token in their position, reflecting increased demand for the opposite token. Once the price reaches the upper or lower boundary (tick) of the position, the entire liquidity is converted into a single asset.

When the price moves back into the defined range, the position is reactivated, and the liquidity once again consists of both tokens, allowing the LP to resume earning fees.

Concentrated liquidity offers LPs significant flexibility. They can open multiple positions across different custom price ranges, tailoring their strategies to market conditions. The underlying algorithm ensures that liquidity distribution is ultimately determined by market dynamics, as most LPs naturally concentrate liquidity around the most active price ranges to maximize fee earnings.