DeFi Faces $12 Billion Inactive Liquidity Crisis, with 95% of Funds Going Unused

A study by 1inch, a decentralized exchange aggregator, highlights a pressing issue in the DeFi sector: the underutilization of capital in major liquidity pools. Data presented at Devconnect Buenos Aires shows that a substantial 83-95% of liquidity in prominent pools, including Uniswap and Curve, remains dormant throughout the year, equating to billions of dollars in idle funds. This inefficiency disproportionately affects retail liquidity providers, with research indicating that 50% suffer financial losses due to impermanent loss, resulting in net deficits exceeding $60 million. The issue is further complicated by the existence of over seven million fragmented pools, which dilutes liquidity and hinders efficient trade routing, ultimately reducing returns for liquidity providers. To address this problem, 1inch proposes its Aqua protocol, designed to enable DeFi applications to share capital across multiple strategies without compromising user custody. According to 1inch co-founder Sergej Kunz, this approach allows users to maintain assets in their wallets while creating virtual trading positions, potentially lowering the barrier to entry for developers and providing a foundation for building on top of existing liquidity.