# Concentrated Liquidity

Concentrated Liquidity is, currently, the most efficient and profitable method of market making that on-chain decentralized exchanges have access to. This was popularized and took the space by storm when Uniswap released their UniV3 model.\
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To get an idea of what UniV3 offers we can compare it to a more centralized, and well-known, liquidity scheme: A CEX Order Book.

<div data-full-width="true"><figure><img src="https://574688988-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2FYMqlsCWiUq0hugfAqLjK%2Fuploads%2FKG5vCd1hn9Ggx4AvstrC%2Fimage.png?alt=media&#x26;token=50178a49-3918-4446-801f-568a9f0ef57f" alt=""><figcaption></figcaption></figure></div>

As you can easily see in the CEX Order Book diagram above, the bid (buys) and asks(sells) are clearly shown, and the depth at which a market order would impact the median price is visually discernable.\
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Interesting enough, the concentrated liquidity model, is represented visually as an inverse histogram of the order book. (Flip the photo upside down and invert the colors).

<figure><img src="https://574688988-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2FYMqlsCWiUq0hugfAqLjK%2Fuploads%2FdrvlWhWhFJ8S95cfzE3n%2Fimage.png?alt=media&#x26;token=4086afd1-a446-406b-b6a6-f079a17f39fd" alt=""><figcaption><p>Concentrated Liquidity Price Range Module</p></figcaption></figure>

The blue area shaded in represents the liquidity ranges summated between all users within the LP pool \[within the same fee-tier, more on this later].

To make it very clear the efficacy differential between x\*y=k  (uniV2) and UniV3's orderbook-style AMM-- it needs to be explained that typical LP positions operate on a **(0,∞) range**.&#x20;

<figure><img src="https://574688988-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2FYMqlsCWiUq0hugfAqLjK%2Fuploads%2Fd5qbT7uOLIGF6WCihQ8B%2FSpread%20of%20Liquidity.png?alt=media&#x26;token=3dded411-5011-4e3b-b7df-0eec010b568d" alt=""><figcaption></figcaption></figure>

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This means that each individual user in the pool is subject to providing liquidity in every possible positive real-number. Since every trade has to consider this when the swapping algorithms are ran, $100,000 of liquidity spread from 0 to ∞ is exponentially less efficient than, say, one with a defined range of ($1,000-$1,100). \
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With the latter example of the $1,000-$1,100 liquidity range, it is calculatable that \
the same $100,000 of liquidity is now concentrated in a $100 price range, providing an **EXTREMELY efficient swapping experience**. Providing the lowest slippage currently feasible within the DeFi space.