The Liquidity Efficiency Gap: How LPs Are Leaving Billions on the Table

Transcript

I'm here to talk to you today about the idle liquidity problem. Now, who here has heard about the idle liquidity problem? Show of hands. Okay, so I'd say maybe a third, but but not so many. Okay. That's good, but let's get into that. What is DeFi's idle liquidity problem? Well, earlier this month, Dune Analytics released their report, capital efficiency in concentrated liquidity.

So, Dune rebuilt every position in the top 200 or so pools on four major venues across seven chains in the first half of the year. And what they found, in conjunction with 1inch, was that about just under a third of concentrated liquidity was outside of the active range. And I want to emphasize that that was pretty consistent throughout the whole of the of the first half of the year except for one spike in around February. And that range was between 25% and about 41%. So, pretty tight, pretty consistent, telling us that this problem is consistent as well.

And when we look at the broader issue of underutilization of capital, we see that 85% is underutilized in the V3 family. And what does that mean and why should you care? It means that liquidity providers are missing out on fees to the tune of around $150 million per year. Okay? And it gets worse. Individual liquidity providers suffer more.

82% of idle capital on bases Uniswap V3 sat in individual wallets, not automated managers. So, where you're not actively managing your capital, you're losing out even more. Why am I telling you this? And what is 1 inch doing about it? So, 1 inch Aqua is shared liquidity, and I'm going to talk to you about that today. What is Aqua?

Aqua represents a shared liquidity layer. So, in this diagram here, we have a taker. So, we're going to look at a swap journey right? So, you can view Aqua as a shared balance sheet that sits underneath um a number of deployed strategies or Aqua applications. So, when a swap is being fulfilled through those strategies, it's using Aqua as the virtual balance sheet.

And those tokens sit in liquidity providers' wallets. So, Aqua is tied into 1 inch's Pathfinder protocol, meaning that the strategies deployed through it are available to people doing swaps on a regular basis. People using Aqua can deploy strategies that are composable, and you can choose what's in and what's out in the UI.

You can choose the range. You can choose whether there's a spread, a decay instruction. You can choose the fee and the type of swap that you're deploying within your position. And why is this important? So, Aqua enables liquidity providers to benefit from a multiplier effect. So, we're setting a band here in the concentrate section, but if your capital is outside of that band, it doesn't matter because you can deploy other positions to increase your chances to earn fees.

So, looking at this now end-to-end, if you're a liquidity provider, you can create positions, configure your token pair, price, and fee as I just showed you. Ship your position. The 1-inch routing will discover those positions and add them to the options for traders to be able to settle against. So, your positions become additional liquidity sources.

Verified counterparties fill against those positions. So, when your price, your position wins the route, the 1-inch resolver executes the swap against your position. And there's one owner of that position. And your tokens are still in your wallet as liquidity provider. So when the swap fills, that's when the tokens move atomically. Both legs happen in one transaction.

And the fee is baked into that. So, you don't need to claim. There's no additional action required there. What does this enable? It enables more swap activity. So, there are more positions that you can cover with the same token balance. It's easier to keep your liquidity in range not because Aqua manages your activity for you. You still need to actively manage your positions, but what Aqua provides is the opportunity for you to ship more positions and have more chances to earn those fees.

So, there's more flexibility there. You can create or cancel a position in one transaction. If you don't like a strategy that you've shipped, you can dock it in terms of the the function naming and ship something else. It's very easy within within the UI. And as I've mentioned, your tokens stay in your wallet under your control. So, true self-custody. And because your positions relate to your wallet address and your wallet address alone, you're protected from just-in-time fee sniping. So,

another benefit of the Aqua design are these additional kind of risk preventions. Okay. So, what do we mean when we say ship positions, ship liquidity provider strategies on Aqua? So, with the composable elements that I showed you before, the jigsaw pieces, those get baked into a verifiable config that's then ABI-encoded and shipped. So, it's signed before you ship it.

In terms of your tokens, you issue one approval per token per chain, and those allowances are revocable at any time. Your wallet provides the cap on the tokens as the the limit available to the protocol. And when you don't have enough tokens in your wallet, Swap simply stops filling against those positions. But if you top up your wallet and you want to continue, they will start again.

And there's risk controlled execution with the swaps being executed by 1-in verified counter parties, so resolvers. I think this slide is building on the same stuff I've just been talking about. So, yeah, the resolvers are essentially market makers and arbitrage traders who have been verified by the 1-in compliance team. And in terms of how secure Aqua is, we've had full auditing. So, 1 2 3 4, at least six auditors have looked across the Aqua uh code end-to-end.

Of course, this doesn't remove risk. So, treat this like you would any other DeFi opportunity. But now let's look at the model. What does Aqua give you that traditional models don't? I've talked about tokens and self-custody. So, with Aqua, your wallet becomes the pool. Your tokens stay in your wallet. You can issue, you can ship many positions, many pools.

Your token balance can be used across as many positions as you like. So, there's a multiplier effect, what we can call liquidity reuse. It's a bit like re-staking for those of you familiar with this. Pricing is configurable and programmable on chain. Fee capture is set per position and it's paid only to you. I've talked about approvals, one revocable allowance per token per chain.

And in terms of what's shipped, your positions are fully verifiable before signing. So now I'm aware that a number of you may be involved in the hackathon with 1-inch here this weekend. I want to touch on what's available. If you want to scan the QR code today, you'll find something a bit different to what it says on the screen now. So, I want to just let you all know we have a bit of a surprise.

This should, if everything is working, should link you to a special beta URL for Aqua early access. And I would ask you a small favor, so please don't post or share the UI online. We're still, as I mentioned, it's it's beta. Um we welcome your feedback, but we may make some changes ahead of full launch, which is happening very soon. When you go into the URL, you should, hopefully, if it's all working, find Aqua. You can play play with Aqua and feel free to submit your feedback.

Um you can also find a link to Aqua learn. And you can find developer docs within that. Um we really encourage building on Aqua. It's an open protocol. And as I mentioned, that we really value feedback on what we're building. So, you can go through the the UI and go through the link at the bottom. Or I'm going to share my email at the end of the presentation. You can contact me directly.

The architecture is fundamentally made up of three parts. There's the aqua.sol smart contract, which is responsible for three things. The strategy life cycle. So, I've talked about shipping positions or canceling positions. So, functions uh ship and dock. That smart contract is also responsible for the virtual balance accounting and the token movement. So, pulling tokens and pushing tokens simultaneously.

And that contract is deployed at the same address on 12 of 13 chains. There's also the strategy part that I've talked about. And aqua app. So, you'll find links to all three of those through aqua learn, through the dev docs inside. The aqua app smart contract can be inherited to provide the strategy struct. Um and that's where the configurable parameters are set. So, those are the fully verifiable parameters. And they are It's worth saying here that that is immutable once shipped.

And I'm showing you the swap function here so that you're aware of how the um trading logic works. We've talked about the transaction being immutable. I've mentioned tokens are pushed and pulled. And this function is where that fundamentally happens inside here. So, you can see balances being pushed and pulled atomically. So, that's it for me. We're very much looking forward to seeing what gets built here this weekend.

My email is here if anybody would like to take some time later to dig into the the beta and submit some feedback. I really appreciate it. Thank you. Thanks, everyone.