Liquidity Fragmentation
The dispersion of liquidity across multiple pools, chains, or exchanges, leading to inefficient pricing and higher costs.
What is Liquidity Fragmentation?
Liquidity fragmentation in DeFi scatters capital across platforms like Uniswap, SushiSwap, and chains like Ethereum and Solana, causing slippage and suboptimal execution—for example, a trade might face good liquidity at $4,500 but poor at $4,550. This drives higher fees and lower efficiency, with models showing fragmentation dominates single-fee markets by attracting more providers.
Economic drivers include varying fees and economies of scale, where smaller LPs trade off execution probability for lower gas.
Aggregators like 1inch mitigate by routing across sources, reducing impact by 10-20%, while hyper-bridges aim to unify pools.
Related Terms
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Intermediate-term U.S. government debt securities with maturities of 2, 3, 5, 7, or 10 years, paying semiannual fixed interest.
Blockchain Trilemma
The blockchain trilemma refers to the challenge of balancing three core properties—decentralization, security, and scalability—in a blockchain network, where optimizing one often compromises the others.
Gas (Ethereum)
A unit measuring the computational effort required to execute transactions or smart contracts on Ethereum.
Custody
Secure storage and management of digital assets by qualified third-party institutions, ensuring protection against theft and unauthorized access.
Consumer Price Index (CPI)
A monthly measure of average price changes in a fixed basket of goods and services purchased by urban consumers, produced by the Bureau of Labor Statistics.
Fixed Rate (Lending)
A stable interest rate locked for a specific period in DeFi lending.