Report Flags Underutilization of Nearly 90% of Concentrated Liquidity in DeFi

A new report from Dune has found that a large share of liquidity supplied by users to decentralized exchanges is failing to contribute to trade execution, leaving substantial amounts of capital inactive despite the introduction of mechanisms designed to improve efficiency.

Concentrated liquidity was developed to make decentralized exchanges more capital efficient by allowing liquidity providers to allocate funds within selected price ranges where trading activity is expected to occur most frequently.

Dune’s analysis, however, shows that the intended benefits are often not being realized. During the first six months of this year, an average of 29.4 percent of liquidity sat outside active trading ranges, meaning those funds did not participate in transactions or earn any fees.

Across Aerodrome Slipstream, Uniswap v3, PancakeSwap v3, and Uniswap v4, the inactive liquidity represented roughly $542 million in unused capital each week. The report estimated that liquidity providers collectively missed out on about $150 million in annual fee revenue as the assets remained outside the trading range.

Further, when considering liquidity that was available but never utilized, the study found that approximately 85% of deployed capital was underused.

According to the report, over $200 million worth of idle liquidity hadn’t been repositioned for over 90 days. This may indicate that many liquidity providers are not actively adjusting their positions as market prices change, even though concentrated liquidity requires ongoing management to remain effective.

The analysis also identified notable differences between automated systems and individual investors. Automated liquidity managers consistently kept a larger share of their capital active, while individual wallets accounted for most inactive holdings.

On Ethereum, wallets held 94 percent of idle capital and controlled 91 percent of Uniswap v3 liquidity. On Arbitrum, they were responsible for 92% of inactive liquidity and managed 78% of overall liquidity. Base showed a similar pattern, with individual users overseeing 82% of idle capital despite smart contracts accounting for about half of all liquidity on the network.

Only 6.5% of positions managed by automated systems were outside the active trading range, compared with roughly 30% of positions held in wallets. This means that automated managers have been considerably more effective than individual liquidity providers at keeping capital available for trading.

Dune concluded that Uniswap v4 has not solved the problem. Although the protocol introduced hooks that could potentially direct inactive capital into external yield strategies, around 30.5% of its liquidity remains outside active ranges, a level similar to Uniswap v3. In addition, only 10% of v4’s total value locked currently makes use of hooks, and none are generating yield from idle liquidity at this time.

As more companies like Riot Blockchain Inc. (NASDAQ: RIOT) help to deepen the penetration of digital currencies within the population, more transactions are likely to take place on DeFi networks and possibly reduce the underutilized concentrated capital on those platforms.

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