Concentrated liquidity is that which is allocated within a custom price range. Traders are offered deeper liquidity around the current price since this is where most of the trading volume occurs, and Liquidity Providers (LPs) earn more trading fees with their capital within this range. Essentially, the TLDR is that Concentrated liquidity allows capital to be more efficient.
Providing liquidity to a price range can be thought of as leveraging a passive LP position. For example, LPs only put up a fraction of the reserves which are used to calculate their proportion of the fees. The smaller the chosen range, the higher the leverage and the larger the proportion of fees the LP can earn. However, smaller ranges also lead to greater losses for the LP when one asset’s price changes relative to the other.
LPs also are free to create as many positions as they see fit, each with its own price interval. Concentrated liquidity serves as a mechanism to let the market decide what a sensible distribution of liquidity is. Rational LPs are incentivized to concentrate their liquidity while ensuring that it remains active.
Which AMMs support concentrated liquidity?
Concentrated liquidity can be found on only only specific AMMs (Automated Market Maker) such as Uniswap and SushiSwap's Trident.
As Steer works to provide integration contracts, expect to find information on backtesting and simulating tools here.
To help app creators and investors make informed decisions when building on the Steer Protocol, we will work to provide tools to backtest or simulate apps. App creators can use the Steer Toolset for backtesting in their development cycle to tune parameters or see if features are working as intended. Users of the platform looking to evaluate the risk of apps in various market conditions can run their own tests on the app to see if they are willing to invest.
To learn more about these tools please see the following links: