CandleFocus

Capital inefficiency is crippling DEXs

Author: Content Editor
Decentralized exchanges (DEXs) face challenges in keeping up with centralized exchanges due to capital inefficiency issues. Unlike centralized exchanges, DEXs rely on independent liquidity providers (LPs) who contribute their assets to liquidity pools. When trading activity is low, liquidity dries up and fees spike, undermining the competitiveness of the decentralized ecosystem. LPs also face the risk of impermanent loss and inefficient asset use. One solution to these issues is concentrated liquidity, which allows LPs to focus their assets within a narrower band where trading is more likely to occur. This optimizes capital allocation and improves returns. Another concept, virtual-margin liquidity, allows LPs to adjust capital exposure based on personal goals, enabling more effective management of investments. To compete with centralized exchanges, DEXs need to improve capital efficiency through strategies like concentrated liquidity and virtual-margin liquidity, attracting more liquidity providers and positioning themselves as a viable alternative.

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