KEY TAKEAWAYS
- 1inch co-founder Sergej Kunz highlights the inefficiency of idle liquidity in DeFi protocols, with up to 95% of liquidity inactive.
- The Aqua protocol by 1inch aims to resolve this by enabling shared liquidity, increasing capital utilization and efficiency.
- Aqua allows assets to support multiple strategies simultaneously, reducing fragmentation and improving returns for liquidity providers.
Speaking at Devconnect Argentina last month, 1inch co-founder Sergej Kunz addressed a significant issue within the decentralized finance (DeFi) sector: the vast amounts of liquidity sitting idle in DeFi protocols. Kunz highlighted that this inefficiency is something 1inch’s new Aqua protocol aims to resolve.
DeFi was initially built on the promise of creating open and efficient markets. However, Kunz noted that the efficiency largely remains theoretical. According to his keynote address at Devconnect Buenos Aires, as reported by Coindesk, between 83% and 95% of liquidity in major pools, such as those on Uniswap v2, v3, v4, and Curve, remains inactive for most of the year. This situation, Kunz described, amounts to a “DeFi liquidity crisis,” with billions of dollars locked in smart contracts without generating fees or meaningful returns.
Understanding the DeFi Liquidity Crisis
In Uniswap v2 alone, only 0.5% of liquidity typically falls within active trading bands, leaving nearly $1.8 billion effectively dormant. Kunz explained that this inefficiency primarily affects retail users, with about half of liquidity providers losing money when impermanent loss is considered. He cited an example of a Uniswap v3 pool that lost over $30 million in profits due to Just-in-Time (JIT) liquidity manipulation.
The root of this liquidity issue, according to Kunz, is fragmentation. DeFi currently has over seven million pools spread across various protocols and networks, which slices liquidity into numerous isolated buckets. This fragmentation complicates efficient trade routing and reduces returns for liquidity providers (LPs).
Aqua Protocol: A Solution for Shared Liquidity
1inch’s response to this challenge is the Aqua protocol, which had a developer release last month. Aqua’s concept revolves around shared liquidity, allowing capital to power multiple strategies simultaneously without being confined to individual contracts. Kunz described Aqua as a “virtual DEX engine” that operates within users’ wallets while remaining fully self-custodial.
With Aqua, users are not required to lock assets in separate pools. Instead, assets can support multiple strategies at once, effectively changing the assumption that liquidity must be fragmented across numerous pools. This approach enables higher capital utilization and efficiency across the DeFi space.
Kunz emphasized that Aqua introduces a new architectural model in DeFi, solving fragmentation for liquidity providers. The protocol allows the full balance to work across several strategies simultaneously, with early back tests showing yield increases of up to five times when liquidity is shared.
Aqua also aims to simplify integration for developers, with Kunz noting that any existing decentralized exchange (DEX) can be implemented with under ten lines of code. The goal is to provide a foundation for building on top, enabling liquidity providers to hold assets in their wallets rather than scattering funds across isolated pools.
For more insights on the DeFi liquidity crisis and Aqua protocol, visit the full article here.
Why This Matters: Impact, Industry Trends & Expert Insights
The introduction of the Aqua protocol by 1inch aims to address the liquidity inefficiencies within the DeFi sector by enabling shared liquidity across multiple strategies, potentially transforming how liquidity is managed and utilized in decentralized finance.
Recent industry reports indicate that DeFi liquidity trends in December 2025 show fluctuating Total Value Locked (TVL) between $94 billion and $150 billion, reflecting ongoing market volatility and recovery from earlier 2025 lows. This aligns with the introduction of Aqua, which seeks to enhance liquidity utilization and efficiency within the DeFi ecosystem.
A AInvest report highlights that the DeFi sector has faced significant liquidity challenges throughout the year, driven by systemic risks and regulatory uncertainty. This supports the significance of Aqua’s shared-liquidity architecture, which could provide a pathway to overcoming these challenges and stabilizing the DeFi market.
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