Is Liquidity Fragmentation Really That Bad?

tl:dr;

Previously viewed negatively, having pools on multiple DEXes is now advantageous due to advancements in aggregators’ routing and AMM design. Bluechip token communities are encouraged to embrace this change for diversified liquidity sources.

In DAO discussions, “liquidity fragmentation” often comes up, usually in opposition to new DEX pools. But it’s not inherently negative. Think of fragmentation as diversification, especially relevant in a token’s life cycle: first as a farming vehicle, then as a store of value*.

Initially, a token’s liquidity and transactions are mostly community-based. A standalone DEX swap widget is the best facilitator here. It’s more straightforward, offers deeper liquidity, and avoids the confusion of multiple DEX options.

When the token evolves into a store of value, it attracts outside traders, often using aggregators like 1inch, focusing on trading costs and slippage.

Aggregators collect quotes from various DEXs, so having liquidity pools on different DEXs enhances overall liquidity. The same dollar can have different effects across DEXs due to their unique high capital efficiency designs, providing competitively priced liquidity even with smaller pools. This highlights the strategic importance of diversifying liquidity, not only in quantity but also in efficiency and pricing.

Consider Lido’s LoL team’s strategy: they observed most w/stETH order flows through aggregators and hence targeted overall on-chain liquidity, incentivizing at least 7 DEXs by September 2023.

For token-centric products, like LSTs, managing slippage is key. High slippage, like in ETH to stETH swaps, can deter users.

Diversifying liquidity sources also mitigates risk. Recent concerns about platforms like Curve emphasize this.

For growth-stage projects, strategic liquidity planning is crucial, but managing multiple pools is challenging. Rocket Pool’s IMC mentions the increased effort required from management and LPs.

Here, Integral offers a solution. In 2023, the DEX cleared about $1.2 billion in volume. The Ethereum pools, like the ETH-USDC pool with only $800k liquidity, processed daily volumes five times their size, while its Arbitrum counterpart offers ~40% swapping fee APR. This makes Integral a prime choice for token projects exploring liquidity options.

Integral aims to simplify concentrated liquidity management in 2024, becoming a key player in farming.

Traditionally, managing concentrated liquidity was complex. Token projects had to adjust incentivized ranges, and LPs needed to actively manage positions. Integral transforms this, streamlining the process. Projects just create a pool, add rewards, and benefit from efficient liquidity placement, competitive quotes, and reduced slippage.

If you’re part of a token project and interested in using Integral for your on-chain liquidity, drop us a DM on twitter.

Remember, on Integral, every bit of liquidity is CONCENTRATED.

* some might categorize it as a unit of account.

None of the information contained here constitutes an offer (or solicitation of an offer) to buy or sell any currency, product or financial instrument, to make any investment, or to participate in any particular trading strategy.

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Integral Insights

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