🤔The Problem: Everything is Sticky

The Problem: Sticky liquidity

It is easy to forget the basics and the most foundational DeFi primitives, Automated Market Makers(AMMs). AMMs with their liquidity pools and lending markets are the engines that drive DeFi. Most of the capital deployed in DeFi is allocated to their liquidity or lending pools.

When people invest in these AMM liquidity pools, helping to create liquidity in the markets and in return earn fees from users swapping across different tokens, their money gets locked up. Thus there are billions of dollars locked & concentrated in these AMMs and lending pools, across numerous blockchains.

Locked is not necessarily a bad thing here, but this removes these billions of dollars out of circulation in DeFi, reducing overall liquidity available across the DeFi ecosystem. This represents significant inefficiency in capital allocation across the ecosystem.

This is generally known as and caused by sticky liquidity. In conclusion, while sticky liquidity can present challenges and potentially create market inefficiencies, the DeFi ecosystem is actively working to address these issues. Through innovations, interoperability, and market evolution, there is a potential for improved liquidity sharing, capital efficiency, and overall market effectiveness.