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.

Tags

Integral Insights

Updates

February 1st, 2024

Integral Insights: January ‘24

Our initial launch with the ETH-RPL pool was a success, quickly elevating us to the second most utilized liquidity pool for this pair’s trading.

Research

January 17th, 2024

Is Liquidity Fragmentation Really That Bad?

When the token evolves into a store of value, it attracts outside traders, focusing on trading costs and slippage. This is when concentrated liquidity truly shines.

Updates

January 2nd, 2024

2023 Review

At Integral, our focus remains on developing a sustainable product for on-chain trading, serving both traders and liquidity providers.

Updates

December 12th, 2023

Integral Now Rewards Liquidity Providers with Trading Fees on Ethereum Mainnet

This enhancement enables liquidity providers (LPs) to directly receive a portion or all trading fees from Integral pools.

Updates

December 6th, 2023

Integral Insights: November ‘23

During November, Integral processed an average of approximately 6 million in volume with around 1.5 million in TVL. The system’s overall capital utilization sits at around 350%. It is the 10th most used DEX on Ethereum.

Updates

November 28th, 2023

Integral Now Rewards Liquidity Providers with Trading Fees

This enhancement enables liquidity providers (LPs) to directly receive a portion or all trading fees from Integral pools.

Research

November 15th, 2023

How Do University Blockchain Societies Gain So Many Votes?

Explore how university blockchain societies like FranklinDAO and Michigan Blockchain have grown into influential players in DAO governance, utilizing delegated votes and strategic partnerships to shape the future of DeFi protocols like Uniswap, Compound, and Aave.

Updates

November 6th, 2023

Integral Insight: October ‘23

We give an update for our work in October and highlight a profitable LP position from a long-term user.

Research

October 26th, 2023

Understanding the Stakes in Lido’s Growing Share of Staked ETH

The community is arguing whether a protocol may have too much control over the Ethereum network. Lido controls a large percentage of staked ETH, which could have consequences for the network’s future security and neutrality.

News

October 14th, 2023

Changes to Staking and Farming

Looking back at our progress so far and to the future with new updates to staking and farming.

Updates

October 11th, 2023

Integral Insight: September ‘23

We give an update for our work in September with utilization going up on higher volume for our new pools.

Research

October 11th, 2023

The Hottest Narratives of the Summer

What were the hottest narratives of the summer? Our DeFi research team delves into the growth of trading bots, RFV traders and more in this overview.

Research

October 2nd, 2023

Uniswap Governance: A Deep Dive

Governance is considered a critical component for the decentralization and community-driven development of DeFi protocols. We take a look at one of the largest goverance ecostystems in DeFi, Uniswap. In this blog post, we'll discuss the landscape of Uniswap's governance, pulling data from empirical research to dissect the system's delegates and proposals, revealing some interesting findings.

Research

September 19th, 2023

What is the DAI Savings Rate (DSR)?

Our research team takes a look at the DAI Savings Rate and its influence on various yield dynamics in DeFi.

Updates

September 15th, 2023

Integral Insight: August ‘23

We give an update for our work in August with cheaper gas fees and the launch of the Integral Relayer on Arbitrum!

Product

September 7th, 2023

Integral Relayer Launches on Arbitrum

We are excited to announce the launch of the Atomic Relayer on Arbitrum. This will bring the efficient and tested system for atomic trades to the Arbitrum Layer 2 network!

Research

August 26th, 2023

How CRV Got Sold OTC

In this post we cover how the Curve founder sold large amounts of CRV in over-the-counter trades in order to prevent a potentially catastrophic liquidation event in DeFi.

News

August 18th, 2023

Integral Insight: July '23

Sharing our progress in July: preparations for atomic swaps on Arbitrum, trading SIZE with lower gas fees and more.

Narratives

August 4th, 2023

Can Real Yield Replace Token Incentives for LPs?

DeFi protocols have relied on the distribution of native tokens to incentivize liquidity providers (LPs). In a previous post, we delved into traditional liquidity incentives and the utilization of vote-escrow tokens. Now, we shift our focus to a fresh approach that has captured the attention of DeFi enthusiasts: concentrated liquidity methods.

News

July 29th, 2023

Post-Mortem Report: Precision Error for Actions in Integral SIZE

A potential vulnerability was identified in the Integral protocol via our Immunefi bounty program. We did not observe the exploit active in production and we have since deployed a patch and the system is back to running as normal. No user funds were lost.