85% of DeFi Liquidity Underutilized, $150M in Fees Lost Annually

A new study conducted by Dune Analytics for 1inch reveals that 85% of concentrated liquidity on decentralized exchanges (DEXs) remains underutilized, leading to an estimated $150 million in lost annual fees. The research, which analyzed liquidity across major platforms like Uniswap v3/v4, PancakeSwap v3, and Aerodrome during the first half of 2026, highlights significant inefficiencies in current automated market maker (AMM) designs.

Concentrated liquidity pools were introduced to improve capital efficiency by allowing liquidity providers (LPs) to concentrate their capital within specific price ranges. However, the Dune study found that 29.5% of liquidity was entirely out of range during an average week, meaning it earned no fees. Moreover, when factoring in capital that was technically in range but untouched by trades, 85% of the liquidity was deemed underutilized. This inefficiency is equivalent to LPs forfeiting between $150 million and $195 million in potential fee earnings annually.

Key Findings

• A Third of Idle Liquidity is Dormant: More than 36% of out-of-range liquidity—around $200 million—had not been adjusted in over 90 days, signaling that many LPs set price ranges and fail to actively manage their positions.
• Smaller Positions Are Less Efficient: Smaller LP positions were more frequently idle compared to larger ones. However, nearly half of all idle liquidity still belonged to positions over $1 million.
• Volatility Isn’t the Main Culprit: Liquidity tends to go idle primarily when prices move far in one direction, not during periods of high volatility that ultimately revert to starting levels. Quiet one-way trends were found to strand liquidity more than sharp, oscillating movements.
• Fragmented Liquidity Across Venues: No single DEX captures more than 60% of trading volume for key pairs like ETH/stablecoins, further exacerbating inefficiencies.

The study also underscores the challenges posed by idle capital in competing with centralized exchanges (CEXs). While DEXs have grown their spot market trading share from 6.9% in early 2024 to 13.6% by early 2026, fragmented liquidity and inefficiencies hinder their ability to offer competitive fee structures and deep market depth. For LPs, this translates to lower returns, while traders face wider slippage, particularly during periods of high market activity.

Structural Challenges and Potential Solutions

The underutilization of liquidity is not limited to the older Uniswap v3 model. Uniswap v4, launched with features like “hooks” that allow pools to implement custom logic, shows no meaningful improvement in idle rates. Roughly 30.5% of liquidity in v4 pools remains out of range, comparable to its predecessor. Although v4 hooks theoretically allow idle liquidity to be deployed to external protocols like Aave or Morpho for yield, few pools currently use this functionality.

Three main strategies could address these inefficiencies:

• Active Management: Automated rebalancing tools and managed vaults can help LPs keep their positions in range as prices move, reducing idle capital.
• Rehypothecation: Deploying out-of-range liquidity into lending protocols or other yield-generating opportunities could allow LPs to earn returns even while their capital is idle.
• Incentive Redesign: Rewarding in-range liquidity, as seen in Aerodrome’s Slipstream model, has reduced idle rates on some venues, though it doesn’t eliminate them entirely.

Implications for the Market

As DEXs aim to attract larger institutional capital, addressing these inefficiencies becomes increasingly critical. Currently, DeFi protocols are competing for a stablecoin liquidity base exceeding $300 billion, according to May 2026 data. However, with 93% of protocol treasuries’ $5.2 billion in assets reportedly sitting idle, the broader DeFi ecosystem itself suffers from capital inefficiency.

For traders and LPs, Dune’s findings highlight the importance of leveraging active liquidity management strategies to maximize returns. Meanwhile, for protocols, tools that consolidate liquidity data across fragmented venues and improve capital utilization will be essential in closing the competitive gap with CEXs. Initiatives like Dune’s real-time DEX market-data feed could be pivotal in enabling smarter capital deployment across decentralized markets.

Image source: Shutterstock