Capital Efficiency
Definition
Capital efficiency measures how effectively a protocol uses deposited capital to generate returns or facilitate trading. Higher capital efficiency means less capital is needed to achieve the same result. In AMMs, concentrated liquidity (Uniswap v3) and liquidity shaping (Maverick) improve capital efficiency by focusing liquidity where trades actually happen instead of spreading it across all prices.
Example
Uniswap v3's concentrated liquidity can provide the same trading depth as Uniswap v2 with up to 4000x less capital, dramatically improving capital efficiency.
Risks to Consider
- Higher impermanent loss with concentration
- Increased complexity
- Active management required
Common Questions
Is higher capital efficiency always better?
Not necessarily. Higher capital efficiency often comes with increased complexity, active management requirements, and amplified impermanent loss. The trade-off depends on the user's strategy and risk tolerance.
