LP efficiency loss: why fragmented crypto liquidity earns less and what Aqua changes

Part of our ‘Liquidity issues in crypto’ series, this article breaks down liquidity fragmentation and what Aqua changes for LPs.

DeFi liquidity is spread across many independent crypto liquidity pools: Uniswap, Curve, Balancer and others. Each protocol has its own pools and LP positions, and these positions do not combine into one shared layer of liquidity.

For liquidity providers (LPs), that creates a structural constraint. One balance cannot back multiple opportunities at the same time. To participate across liquidity pools or strategies, assets must be split into separate deposits. Once capital is divided, efficiency starts to drop.

What “efficiency” means for liquidity providers

LP efficiency is capital utilization: how much of the deposited crypto liquidity is actually being used to process swaps and earn fees.

High utilization means capital is “working” most of the time. Fragmentation lowers utilization, even when everything is technically deposited and active.

1) More deployed capital sits idle, so fee capture drops

LPs earn fees when swaps go through the specific liquidity pool where their tokens were provided. If the market routes trades elsewhere, a position can be “active” but barely productive in reality.

The deeper difficulty is structural: liquidity can exist in only one place at a time. To participate across multiple pools or strategies, LPs must pre-split their capital into isolated deposits before demand is known. As a result, some of that liquidity often ends up in places less likely to capture meaningful trading flow, such as:

• Pools with liquidity but low trading volume
• Platforms where routing consistently favors another venue
• Pools that are only occasionally optimal for execution

This creates a utilization gap: capital is spread across multiple deposits, but only part of it captures significant trading activity. The rest remains active on paper but idle in practice.

The challenge is inherent: if an LP commits everything to a single pool, they may earn nothing if no trades pass through it. Fragmentation is a consequence of the structure of DeFi liquidity pools.

2) Even the right pair can miss the best flow

Volume is not evenly distributed across DeFi. Even for the same pair, one liquidity pool often dominates for a period of time because it has deeper liquidity, better pricing or stronger routing.

Fragmentation pushes LPs toward “coverage.” Instead of committing capital where demand is strongest, funds get spread across multiple pools to be present everywhere. But that also means under-allocating to the pool that matters most.

So returns can disappoint not because the market was quiet, but because too little capital was placed where most swaps actually happened.

 A simple example

An LP provides liquidity for WETH/USDC and splits funds across three venues.

• Liquidity pool A gets ~80% of the WETH/USDC swap volume this month
• Liquidity pool B and liquidity pool C share the remaining ~20%

If crypto liquidity is split evenly, only one third of capital is sitting in the place where most fees are being generated. Two thirds are mostly watching from the sidelines.

The total deposit is the same, but fee capture is lower than it could be if the same capital could concentrate automatically where demand is.

The core issue: liquidity is active, but not unified

Fragmentation is not just a UX inconvenience. It is one of the structural liquidity issues in crypto that can affect how efficiently LP capital is used.

When the same total capital is split across isolated pools, it tends to result in:

• Lower utilization, because more of it sits away from the main flow
• Weaker fee capture, because swaps concentrate in only a subset of venues
• Diluted exposure, because the “best” opportunity receives only part of your allocation

Crypto liquidity works best when it can concentrate where demand is. Fragmentation makes that harder by design. It turns one strong position into several smaller ones, and in fee-driven markets, that split is rarely neutral.

This is how DeFi used to work. Now we measure what’s actually usable

For a long time, liquidity was tied to individual pools inside individual protocols.To get broader exposure, capital had to be split across crypto liquidity pools and each position had to find enough real flow.

That structure helped DeFi grow, but it also locked crypto liquidity into separate pockets. Even when TVL looks large, a lot of that capital is not actually used when trades happen. In fact, 1inch research suggests that 83% to 95% of liquidity in major pools sits idle for most of the year, which is roughly $12 bln that is deposited but not consistently helping execution in real time.

Shift from TVL to TVU

TVL became the default metric in DeFi because it was easy to count. It tells how much capital is deposited across protocols.

But for LPs, the real question is simpler: how much of the liquidity is actually usable when trades happen, and how much of it is doing work and earning fees.

That is where TVU comes in. Total Value Unlocked focuses on useful liquidity. Not just capital that exists on paper, but capital that can be applied when and where demand shows up.

Aqua as a new crypto liquidity solution for LPs

This is the core idea behind 1inch Aqua, a new approach to crypto liquidity solutions built around shared liquidity and atomic execution. An LP connects their liquidity to Aqua, and the protocol continuously deploys it across strategies. If one designated strategy is not utilizing the liquidity, Aqua automatically reallocates the same capital to alternative strategies.This ensures all liquidity is continuously utilized and earns fees, instead of being locked into one or more isolated pools where a large portion might otherwise sit idle. Shared liquidity allows the same assets to be flexibly applied wherever demand arises.

Unlike trading aggregators, which require LPs to spend time and effort integrating, Aqua only needs LPs to connect their wallets, and the protocol does the rest. 

For LPs, the goal is straightforward. Aqua is designed to help reduce idle liquidity and make more liquidity available where execution happens. That is the difference between capital that is merely deposited and capital that is truly usable and utilized.

Aqua is already live for developers. Builders can use the 1inch Aqua Protocol today, while improvements to the shared liquidity layer continue to be developed.

Stay tuned for more articles on liquidity, efficiency and what Aqua unlocks!