A study commissioned by decentralized exchange aggregator 1inch has found that approximately 85 percent of concentrated liquidity in DeFi pools is underutilized, representing a significant inefficiency in the automated market maker model. The research, conducted by Dune Analytics, estimates that idle liquidity positions are forgoing roughly 50 million in annual fee generation across seven blockchain networks.
Concentrated liquidity, popularized by Uniswap v3 and similar protocols, allows liquidity providers to allocate their capital within specific price ranges rather than across the entire price curve. This approach was designed to improve capital efficiency compared to the original automated market maker design.
However, the study reveals that the majority of these concentrated positions are placed outside active trading ranges, meaning they are not capturing trading fees. When the price moves outside a liquidity provider chosen range, the position becomes inactive until the price returns, leaving capital idle in the meantime.
The findings highlight a persistent challenge for DeFi liquidity providers: managing range positions requires active monitoring and frequent adjustments to keep capital working efficiently. Many providers may lack the time, tools, or expertise to optimize their positions continuously.
This inefficiency has implications for the broader DeFi ecosystem. Idle liquidity means that traders may face worse execution prices than they would if more capital were actively deployed, and it reduces the overall capital efficiency of the protocols that rely on concentrated liquidity models.
The study suggests that automated liquidity management strategies and improved tooling could help address the underutilization problem, potentially unlocking better returns for liquidity providers and tighter spreads for traders across decentralized exchanges.
This article was adapted from AMBCrypto. Read the original here.
