> For the complete documentation index, see [llms.txt](https://docs.kumbaya.xyz/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.kumbaya.xyz/liquidity/concentrated-liquidity.md).

# What is concentrated liquidity?

Kumbaya's DEX runs on **Uniswap V3 concentrated liquidity** — a different model from the classic 50/50 pool you might know from Uniswap V2. This page explains the idea in plain English so the rest of the liquidity docs make sense.

## The classic AMM, briefly

In a classic 50/50 AMM (Uniswap V2-style), liquidity providers deposit equal value of two tokens. The pool's price is whatever ratio those tokens currently sit at. As people trade, the ratio shifts and price moves. Anyone's deposit is "active" across **all possible prices, from zero to infinity**.

This is simple but inefficient — most of the deposited capital sits at prices that almost never get touched.

## What concentrated liquidity changes

In Uniswap V3 (which Kumbaya forks), **you choose a price range** when you deposit:

* You only deposit liquidity active between, say, $1.00 and $1.20 for a stablecoin pair, or $2,500 and $3,500 for ETH/USDC.
* Your liquidity is "concentrated" inside that range — much denser per dollar than a V2-style position.
* You earn fees from any swap that crosses through your range.
* If price leaves your range, your position stops earning fees and converts entirely to one of the two tokens.

The trade-off: **you earn more fees per dollar of liquidity** while in range, but you're exposed if price moves out.

## Mental model: setting your range

Think of your range as a bet: "I think the price will spend a lot of time between X and Y." Tighter ranges earn more per dollar but are more likely to go out of range.

| You think the pair is…           | Pick a range           |
| -------------------------------- | ---------------------- |
| Pegged stablecoins (1:1 forever) | Very tight, e.g. ±0.5% |
| Two correlated tokens            | Tight, e.g. ±10%       |
| Volatile but you have a thesis   | Medium, e.g. ±25%      |
| You have no view on direction    | Wide, or full-range    |

## What's a "tick"?

The pool tracks price in discrete steps called **ticks**. Each tick represents a 0.01% (1 basis point) change in price — `price = 1.0001^tick`. You set your range by picking a lower tick and an upper tick.

You don't usually deal with raw ticks in the UI — Kumbaya's UI lets you drag bounds on a chart or type prices, and converts under the hood.

## Fee tiers

V3 pools come in four fee tiers:

| Fee tier  | Tick spacing | Best for                                 |
| --------- | ------------ | ---------------------------------------- |
| **0.01%** | 1            | Stable ↔ stable (e.g. USDC/USDT)         |
| **0.05%** | 10           | Major correlated pairs (e.g. ETH/USDC)   |
| **0.30%** | 60           | Most pairs (the V2 default)              |
| **1.00%** | 200          | Exotic, volatile, or low-liquidity pairs |

Tighter fee tiers have tighter tick spacing — meaning your range can be more precise — but tend to host less volatile pairs.

## Impermanent loss, in plain English

If price moves significantly while you're an LP, the value of your position can be lower than if you'd just held the two tokens. That's **impermanent loss**, and it applies to all AMM liquidity — V2 and V3.

In V3, IL is **amplified within your range** because your capital is concentrated, but you're also earning more fees. Whether the trade-off is positive depends on volume, range tightness, and how often price moves out of your range.

## Where to next

* [**Adding liquidity →**](/liquidity/add-liquidity.md)
* [**Managing your positions →**](/liquidity/manage-positions.md)
* [**Removing liquidity and collecting fees →**](/liquidity/remove-liquidity.md)


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