How Price Moves Affect Liquidity

Note for DEX Teams:

This section helps users understand how their liquidity behaves over time and what it means for their earnings. By clearly explaining the difference between active and inactive liquidity—and outlining user-friendly strategies for managing each state—your DEX can build user confidence and reduce friction in onboarding new LPs.

Because Algebra-powered DEXes don’t allow mid-position edits (to maintain protocol efficiency and integrity), it’s essential that users know how to actively manage or exit positions. This knowledge reduces frustration and improves retention by making users feel in control.

By integrating alert tools (like notification bots), visual status indicators, and clear guidance around rebalancing, passive holding, or adding liquidity, your DEX can attract both active and passive LPs, each with different levels of engagement and risk tolerance—while maximizing overall liquidity depth and fee generation across pools.

Once you choose a price range for your liquidity position, it’s important to keep an eye on market movements to ensure your liquidity stays active and continues earning fees. If you prefer a more passive approach and don’t want to monitor the market regularly, you can choose to provide liquidity across a wide or full range, though this typically offers lower returns.

On most Algebra-powered DEXes, liquidity positions are not editable after creation — meaning the price range and token amounts are fixed once the position is submitted. To change these parameters, you’ll need to withdraw your existing position and create a new one with updated settings.

Once a position is live, it will either be in an active state (within your selected range and earning fees) or inactive (outside the range and not earning). Understanding how this works is key to making the most of your liquidity.

Active Liquidity = Active Earnings

On Algebra-powered DEXes, liquidity providers (LPs) earn trading fees only when the market price is within the price range they selected. This is called active liquidity.

When your liquidity is active, you automatically earn fees from trades and may also participate in LP rewards or farming programs (if enabled by the DEX).

Example

Let’s say the current price of a token pair (e.g., TOKEN/USDT) is $6.00. You provide liquidity by adding:

• 166 TOKEN

• 1000 USDT (Total ≈ $2000)

You then set a narrow price range from $5.70 to $6.60. This means:

• You’ll earn fees only when the price is inside this range.

• The narrower the range, the higher your potential APR — but also, the greater the risk that the price moves out of it.

📈 If your range earns an estimated 100% APR, and the price stays in range for a month, you’ll collect a portion of that APR in fees.

📍 If the price exits the range, your position becomes inactive — no fees are earned.

• If price rises above the range → You’ll hold mostly USDT.

• If price falls below the range → You’ll hold mostly TOKEN.

Inactive Liquidity = No Earnings

If the market moves outside your selected price range, your position becomes inactive — it won’t earn fees until the price returns to the range.

But what can you do when that happens? Here are your options:

Option 1: Hold Your Position (Passive Approach)

You can leave your position unchanged and wait for the price to return to your range.

Pros: ✅ No need to pay gas or fees to adjust ✅ Starts earning fees again automatically once the price re-enters your range

Cons: ❌ No earnings while out of range ❌ Exposure may shift to just one asset, which may not match your market outlook

Option 2: Adjust Your Range (Active Approach)

Withdraw and re-add liquidity at a new price range that aligns with current trends. This can be done using dual-asset or single-sided liquidity.

Pros: ✅ Resume earning fees if the price stays in the new range ✅ Maintain exposure to desired asset direction

Cons: ❌ You’ll incur transaction fees ❌ Price may shift again, requiring further adjustments

Option 3: Withdraw & Hold

Exit the pool by withdrawing your liquidity. You can hold assets or use them elsewhere.

Pros: ✅ Avoid potential impermanent loss if you expect further price shifts ✅ Flexibility to invest in other opportunities

Cons: ❌ No more fee income ❌ Potential gas fees or tax events, depending on jurisdiction

Option 4: Add More Liquidity

You can add new liquidity at a different price range while keeping your original position untouched.

Pros: ✅ Cover a wider price range and capture more fees ✅ Diversify your strategy across multiple price zones

Cons: ❌ Greater exposure to market risk ❌ More capital required

Stay in Control

Keep track of your positions to avoid long periods of inactive liquidity.