Concentrated Liquidity Pools (CLPs) are a novel type of liquidity provision mechanism that have recently been introduced to the decentralized finance (DeFi) space. They were first developed by the Uniswap team and have since been adopted by several other leading DeFi protocols, now including SkullSwap.
CLPs offer several advantages over traditional automated market makers (AMMs). The primary benefit is the increased capital efficiency. In traditional AMMs, liquidity providers are required to provide liquidity across the entire price curve. With CLPs, liquidity providers can concentrate their liquidity around a specific price range, enabling them to provide more liquidity in the price ranges they are most comfortable with. This can lead to lower slippage for traders and greater trading volumes.
Another key advantage of CLPs is greater flexibility and customization. Liquidity providers can choose to concentrate their liquidity at specific price points, enabling them to better manage risk and tailor their positions to specific market conditions. This can result in improved returns for liquidity providers and a more stable market overall.
Additionally, CLPs can help to reduce impermanent loss for liquidity providers. Impermanent loss is a common problem with traditional AMMs, where liquidity providers can experience losses due to fluctuations in the price of the underlying pair of assets. CLPs mitigate this risk by allowing liquidity providers to concentrate their liquidity at specific price points, reducing their exposure to impermanent loss.
Overall, CLPs represent an exciting development in the DeFi space, offering increased efficiency, flexibility, and risk management capabilities for liquidity providers.
For a more technical approach please read Algebra Tech Paper: