Providing pool liquidity only within a chosen price band, earning far more fees per dollar while it trades inside that band and nothing outside it.
Classic pools spread capital across every price from zero to infinity, most of which never trades. Concentrating it into a band, say 2,800 to 3,200, means the same dollar does the work of many, so fee income per unit of capital rises sharply.
The mirror image is that your position converts fully to one asset at the edge of the range and then stops earning. Price leaving your band means you are holding 100% of the losing side with no fees accruing, which is impermanent-loss taken in concentrated form. Narrow ranges need active management and cost gas to rebalance.
Positions are issued as NFTs rather than fungible tokens because each one has its own bounds. A common mistake is judging these strategies by advertised APR, which annualises fees earned while in range and quietly ignores the days spent out of it and the divergence already realised.
Original diagrams for the ideas on this page. Illustrative, not real market data.
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.Range versus trend. On the left price keeps bouncing between the same floor and ceiling, which is a range. On the right each high and each low is higher than the last, inside a pair of sloping lines called a channel.
Educational only, not advice. Spotted an error? Post in Site Feedback.