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
UK Stablecoin Regulation
UK's Financial Conduct Authority framework requiring authorization for stablecoin issuance, with 100% backing by high-quality liquid assets.
Open Interest
The total value of outstanding perpetual swap contracts on a Perp DEX.
Liquid Staking
A staking mechanism on Ethereum where users receive derivative tokens representing their staked ETH, allowing them to use these tokens in DeFi activities while earning staking rewards.
Long Position
A trade betting on the price increase of a digital asset.
Mnemonic and Private Key
A mnemonic is a human-readable phrase used to generate and recover cryptographic keys, while a private key is a secret number authorizing Bitcoin transactions.
MiCA
EU regulation governing digital assets, including stablecoins, for market integrity and consumer protection.