85% of DeFi Liquidity Wasted

1inch is introducing a new approach to optimize asset utilization in decentralized finance through its shared liquidity layer, Aqua. According to Holly Atkinson, chief product and technology officer at 1inch, Aqua enables users to support multiple liquidity positions with a single token balance.

Traditional automated market maker (AMM) pools require liquidity providers to deposit tokens into specific pools, which can lead to underutilization of assets. In fact, research conducted by 1inch with Dune found that about 85% of concentrated liquidity is underutilized. This means that most capital sitting in traditional AMM pools in DeFi is idle on any given day, earning nothing while still carrying impermanent loss risk.

Aqua allows multiple liquidity positions to reference tokens that remain in a provider's wallet, rather than requiring users to divide and deposit their assets into separate pools. When a swap occurs, the tokens transfer directly from the provider's wallet to the swapper in a single atomic transaction. The Aqua contract itself holds no tokens, and providers can revoke their allowance at any time.

## How it works Aqua can be thought of as a registry, where users connect a wallet and approve a token balance that can back multiple positions without depositing those tokens into the protocol. This approach reduces protocol custody risk, although market risk and smart contract risk still apply.

## Why it matters The introduction of Aqua has significant implications for the DeFi space, as it aims to make better use of assets provided for trading. By allowing users to support multiple liquidity positions with a single token balance, Aqua can help reduce the underutilization of assets and increase the efficiency of liquidity provision. As the DeFi space continues to evolve, innovative solutions like Aqua are crucial for optimizing asset utilization and minimizing risks.