Capital Inefficiency
The underutilization of provided liquidity in DeFi protocols, where most capital remains idle across unused price ranges.
What is Capital Inefficiency?
Capital inefficiency plagues traditional AMMs by spreading liquidity evenly from zero to infinity, meaning only a fraction is active at the current price. In Uniswap v2, for volatile pairs like ETH/USDC, over 90% of capital might be unused, as trading occurs narrowly around $4,500. This requires larger pools to achieve depth, increasing impermanent loss exposure.
Fragmentation across chains exacerbates this, with liquidity siloed on Ethereum, Solana, etc., leading to suboptimal allocation and higher slippage. Solutions like concentrated liquidity in v3 boost efficiency by 4000x in some cases, focusing capital on active ranges.
Novel designs, such as predictive AMMs, reduce inefficiency by 50-70% through dynamic adjustments, as per 2024 research, enabling better returns for providers.
Related Terms
STRF
Strategy's 10.00% Series A Perpetual Strife Preferred Stock, a non-convertible preferred equity providing high fixed dividends without equity upside.
Circle
The company behind USDC, focused on building transparent and compliant digital asset solutions.
Fee Tier
The percentage fee charged on DEX trades, set by liquidity pools and distributed to liquidity providers, varying by pool type and volatility.
Dual-Offline Payment
A feature allowing transactions without internet for both parties, using NFC or similar tech.
Diamond Hands
A term describing traders or investors who hold onto their digital assets through market volatility, demonstrating strong conviction and risk tolerance.
Bid-Ask Spread
The difference between the highest bid price and the lowest ask price in an order book, indicating market liquidity.