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.
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