Concentrated Liquidity on Swop.fi: What It Is and How It Works
In this article, we'll explain what concentrated liquidity is and what it means for Swop.fi.
Why Are Liquidity Pools Important?
Liquidity pools are reservoirs of distinct asset pairs made available for trading using an automated market maker (AMM). Liquidity, in this context, refers to the aggregated supply of token pairs in liquidity pools. The price of each token in a liquidity pool is calculated by an algorithm that uses supply and demand principles (Swop.fi uses a custom implementation of this mechanism on the Waves blockchain, inspired by Uniswap V3). Swop.fi relies on the liquidity provided to a broad set of these pools to make sure assets are consistently and reliably available for exchange.
Liquidity is the lifeblood of DeFi (and any financial system). More liquidity supports a more stable ecosystem, which is why liquidity providers (LPs) are fundamental. To incentivize LPs to deploy assets into pools, AMMs provide rewards from liquidity pool trading fees. This is DeFi 101 — by providing your assets as liquidity, you put your assets to work and gain yield while contributing to the ecosystem's health.
Swop.fi's standard pools (CPMM, Flat, and multi-curve) have long enabled users to earn rewards by providing liquidity. Now, with the launch of concentrated liquidity (V3), we take liquidity management to a fundamentally new level — allowing LPs to choose their own price ranges and dramatically increase their capital efficiency.
What Is Concentrated Liquidity?
When an LP provides liquidity to a standard pool (e.g., a CPMM pool on Swop.fi), that liquidity is made uniformly available across the entirety of the price curve determined by the algorithm, from zero to infinity. That means a substantial amount of liquidity is not used because it is made available only at prices outside of the range at which the pool is executing swaps.
In other words, when you provide assets to a pool as an LP, only a small part of the assets you provide are actually being used for swaps. Because fees are only collected within the ranges that swaps happen, only some of the assets you provide generate rewards.
Concentrated liquidity changes that by giving LPs the power to determine specific price ranges to provide liquidity. Instead of providing liquidity across the entire price curve, concentrated liquidity gives LPs the power to choose a range of the price curve at which they expect swaps to take place. That means a much larger percentage of a user's deposited liquidity gets used.
When done right, the result is a dramatic amplification of yield — as much as 200–300x compared to a standard pool. By limiting the liquidity range to prices where swaps are taking place, you can massively increase the volume of swaps for which your liquidity is used. The result is a large gain in rewards. This also means a potential for much greater capital efficiency since LPs can place less capital at risk to achieve a similar yield opportunity.
As a result of this increased efficiency, a DEX implementing concentrated liquidity effectively deepens its pools, leading to greater stability and a better UX. For example, by incentivizing deeper liquidity around existing prices, traders can benefit from decreased price impact. For any individual LP, concentrated liquidity pools mean greater freedom to follow different strategies, resulting in a more dynamic and optimized trading environment.
Key Advantages of Concentrated Liquidity
Concentrated liquidity offers several compelling benefits for both liquidity providers and the broader ecosystem:
• Higher capital efficiency. LPs can earn the same (or greater) fees with significantly less capital by focusing liquidity where it matters — around active trading prices.
• Amplified yields. By narrowing the price range, a larger share of your deposited assets participates in every swap, resulting in substantially higher fee income per unit of capital.
• Lower slippage for traders.
Deeper liquidity around current prices means traders experience less price impact on their swaps, making the exchange more competitive.
• Flexible strategies. LPs can tailor positions to their market outlook — tight ranges for stable pairs, wider ranges for volatile assets, or multiple positions across different ranges to diversify risk.
• Reduced capital at risk. Achieving comparable returns with less capital means LPs can keep a portion of their assets free for other opportunities or as a safety margin.
• Better price discovery. Concentrated liquidity around market prices creates tighter spreads, contributing to more accurate and efficient price discovery on the DEX.
While these advantages are significant, they come with the trade-off of active management — which we address in the section on challenges below.
Swop.fi V3 Concentrated Liquidity
Swop.fi implements concentrated liquidity through its V3 pools on the Waves blockchain. The implementation supports flexible price range configuration and a transparent fee split: 55% to liquidity providers, 35% to governance, and 10% to the team.
One key aspect of concentrated liquidity is that the liquidity bounds set by LPs cannot be placed with arbitrary precision — they must correspond with available "ticks" placed at intervals across the price curve. Swop.fi V3 uses a tick-spacing mechanism that allows price ranges to be set with sufficient granularity.
Under the hood, Swop.fi V3 architecture separates responsibility between two smart contracts: v3_global (all business logic: initialize, mint, burn, collect, swap) and v3_on_address (a wrapper deployed at each pool address that stores state). Updating a single global contract automatically updates the logic for all V3 pools. Security is enforced through a 2-of-3 multisig scheme.
Creating new V3 pools and migrating existing pools to concentrated liquidity is managed through an administrative process. This means the full rollout of V3 across all assets available on Swop.fi will happen gradually.
The Challenge of Managing Concentrated Liquidity Positions
With more complex liquidity pools come new challenges for liquidity providers. Despite the lucrative fees that can be earned with specified price ranges, LPs may face losses if they fail to manage their positions carefully. There are two key considerations:
• The risk of impermanent loss increases when an asset's price fluctuates within the range.
• If the asset's price falls outside the set range, no rewards from swap fees will be earned.
When assets move along the price curve within your given price range, your ratio of assets changes as swaps take place. When an LP specifies a price range for liquidity, they effectively place a limit buy and sell order. The consequence of an asset's price moving out of range is a position comprised fully of the underperforming asset that no longer earns fees.
Smaller ranges that accurately target swap prices mean higher revenue. But such a range will have to be changed frequently. To use concentrated liquidity pools effectively, an LP must constantly adjust price ranges and actively manage their positions. Pools with highly correlated tokens or stablecoin pairs make good targets for concentrated liquidity strategies since the relevant price bands are typically more predictable.
Taking advantage of concentrated liquidity means that LPs must make adjustments that can be time-consuming, challenging, or even impossible to do manually. Ultimately, concentrated liquidity is an advanced strategy that requires a deep understanding of the market and active position management.
About Swop.fi
Swop.fi is a leading DEX on the Waves blockchain, providing a comprehensive suite of tools for asset exchange and liquidity provision. The platform supports multiple pool types — CPMM, Flat (optimized for stablecoins), multi-curve, and now V3 concentrated liquidity pools. The platform's native token, SWOP, is used for governance and protocol fee distribution.
Swop.fi strives to deliver the most efficient, secure, and user-friendly trading infrastructure for the Waves ecosystem, continuously expanding its functionality and adopting cutting-edge DeFi mechanisms.