Active Liquidity

As the price of an asset rises or falls, it may exit the price bounds that LPs have set in a position. When the price exits a position's interval, the position's liquidity is no longer active and no longer earns fees.

As price moves in one direction, LPs gain more of the one asset as swappers demand the other, until their entire liquidity consists of only one asset. If the price ever reenters the interval, the liquidity becomes active again, and in-range LPs begin earning fees once more.

Importantly, LPs 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, as rational LPs are incentivized to concentrate their liquidity while ensuring that their liquidity remains active.