Concentrated Liquidity

Introduction

The core feature of the KoalaSwap protocol is concentrated liquidity—liquidity that you can allocate within a custom price range. In earlier models, liquidity was spread evenly across all possible prices (from 0 to infinity), but much of it often went unused.

Take stablecoin pairs where the price stays close to 1:1. In the old system, only about 0.50% of the total liquidity was active in the typical range ($0.99–$1.01), where most trading happens. With KoalaSwap, liquidity providers can focus their capital in smaller, high-traffic ranges—like 0.99–1.01 for stablecoins. This gives traders deeper liquidity at the current price and lets LPs earn more fees. We call each focused range a position, and LPs can create multiple positions per pool to match their preferences.

Active Liquidity

As the price of an asset moves, it may leave the range you’ve set for a position. When this happens, your liquidity becomes inactive and stops earning fees. As traders swap, you’ll end up with more of one asset until your position holds only that asset. If the price returns to your range, the liquidity activates again, and you start earning fees.

LPs are free to create as many positions as they want, each with its own range. This lets the market naturally decide the best liquidity distribution, as rational LPs will focus their funds where they stay active.

Ticks

Concentrated liquidity works by dividing the price range into discrete steps called ticks. Each tick represents a small price change—about 0.01%—and acts as a boundary for your positions. When you create a position, you pick the lower and upper ticks to define its range.

As the price changes during a swap, the pool contract uses the liquidity within the current tick range, switching to the next tick when needed. This activates any dormant liquidity tied to that tick. The spacing between ticks depends on the pool’s fee level: lower fees allow tighter ticks, while higher fees have wider spacing.

Tighter tick spacing (common in stablecoin pools) improves capital efficiency, reduces price impact, and offers better swap prices. Crossing an active tick increases the transaction cost slightly, as it activates new liquidity.