The main liquidity provision models in DeFi

DeFi liquidity is not one thing. It comes from pools, ranges, vaults, market makers and intent-based systems - each with clear strengths and trade-offs.

What happens when DeFi capital isn’t where traders need it? That’s the liquidity problem.

When liquidity is deep, swaps feel effortless. You choose a token, confirm the trade and receive the asset you wanted at a fair rate.

When liquidity is weak, everything gets harder. Prices move against you. Routes fragment. Large swaps create high price impact. Liquidity providers may deposit capital but still earn less than expected.

DeFi no longer relies on one liquidity provision model. Different systems now compete to answer the same question: how can capital be made available where it is needed most? Here are the main liquidity models - and where each one works or breaks down.

Traditional AMM pools

Automated market makers, or AMMs, are the classic DeFi liquidity model. LPs deposit two or more assets into a pool. Traders swap against that pool. The pool uses a formula to set prices, and LPs earn fees from trading activity.

The strength is simplicity. Anyone can provide liquidity. Anyone can trade. There is no need for a centralized order book or a traditional market maker.

This model helped DeFi scale because it made markets open by default. But the weakness is capital efficiency. In many AMM pools, much of the deposited liquidity does not actively support trades most of the time. Capital sits in the pool, but only part of it may be close enough to the active price range to earn meaningful fees. For LPs, that creates a problem: funds can be “deployed” but still underused.

Concentrated liquidity

Concentrated liquidity tries to make LP capital work harder. Instead of spreading liquidity across all possible prices, LPs choose a price range. If trades happen inside that range, the capital can be more efficient and earn more fees.

The strength is better capital utilization. This model can support deeper liquidity around the current market price, which can reduce price impact for traders and improve fee capture for active LPs.

But the weakness is complexity. LPs have to choose ranges, monitor price movement and rebalance positions. If the market moves outside the chosen range, the liquidity may stop earning fees. This makes concentrated liquidity powerful for active or professional LPs, but harder for passive users.

Stable pools

Stable pools are designed for assets that should trade near the same value. That usually means stablecoins or closely related assets, such as different versions of wrapped tokens.

The strength is low-slippage trading. When the assets stay close in value, stable pools can provide very efficient swaps. This makes them useful for stablecoin trading, payments, treasury movement and other low-volatility flows.

But the weakness appears when the relationship breaks. If one asset depegs or becomes less trusted, the pool can become imbalanced. LPs may end up holding more of the weaker asset. So stable pools work well for a specific type of liquidity, but they do not solve the broader issue of fragmented capital across DeFi.

Order book liquidity

Order book systems look more like traditional exchanges. Buyers place bids. Sellers place asks. Trades happen when prices match.

The strength is precision. Order books can work well for active markets, advanced trading and derivatives. They allow limit orders, visible depth and more familiar trading mechanics for professional users.

But the weakness is that order books need constant liquidity. They depend on active market makers and fast updates. Fully on-chain order books can also be expensive or slow on some networks, which is why many systems use hybrid designs.

Order books can be effective, but they are not always the best fit for long-tail assets or fragmented liquidity.

Managed liquidity vaults

Managed vaults make liquidity provision easier. Instead of choosing pools or ranges manually, LPs deposit assets into a vault. The strategy then manages allocation, rebalancing and execution.

The strength is convenience. Users do not need to manage every position themselves. This can make advanced LP strategies more accessible.

But the weakness is that capital is still usually committed to one strategy. If the strategy does not capture enough flow, the capital may still be underused. LPs also take on strategy risk and depend on the manager or automation behind the vault.

Managed vaults reduce manual work. They do not remove the deeper issue of capital being locked into separate structures.

Professional market makers

Professional market makers provide liquidity using inventory, pricing systems and risk management.

They can quote prices, support larger trades and source assets from different venues. The strength is execution quality. Market makers can be especially useful where public liquidity is thin. They can help support new assets, larger trades and intent-based execution.

But the weakness is availability. Market-maker liquidity depends on inventory, risk appetite and market conditions. During volatile periods, spreads can widen or liquidity can disappear. This makes market makers an important part of DeFi, but not a universal answer.

The shared problem: fragmentation

Every liquidity model has pushed DeFi forward in its own way. AMMs made decentralized trading accessible. Concentrated liquidity improved capital efficiency. Stable pools reduced slippage for similar assets, while order books brought more advanced trading capabilities. Vaults simplified liquidity management, market makers improved execution and intent-based systems made routing more flexible. Aggregators then connected fragmented liquidity across multiple venues.

Yet the same challenge remains. Liquidity is still spread across different pools, chains, strategies and trading venues. LPs must decide in advance where to deploy their capital, and if demand emerges elsewhere, that liquidity may never be used. As a result, there is often a gap between deposited liquidity and useful liquidity. A protocol may report high TVL, but only a fraction of that capital may actually be available when traders need it most.

From locked liquidity to useful liquidity

The next phase of DeFi liquidity should not be measured only by how much capital is locked. The better question is: how much of that capital can actually be used?

Useful liquidity is liquidity that can support execution when demand appears. It is not just sitting in a pool. It is available, active and connected to real trading flow. That shift matters for everyone.

For traders, it can mean better prices and lower price impact. For LPs, it can mean better capital utilization. For builders, it can mean less need to compete for isolated deposits. For DeFi, it can mean more efficient markets.

Liquidity provision is evolving

There is no single perfect liquidity model. Each approach solves part of the problem and introduces its own trade-offs.

The important trend is clear: DeFi is moving away from simple locked capital and toward more flexible liquidity infrastructure.

That does not mean existing models disappear. AMMs, stable pools, vaults, market makers and aggregators will continue to matter.

But the market is starting to demand more. Liquidity needs to be easier to access, less fragmented and more productive. One promising direction is shared liquidity: capital that is not locked into one isolated pool or strategy, but can support multiple opportunities at the same time.

For LPs, this could mean better utilization. For traders, it could mean deeper and more available liquidity. For builders, it could reduce the need to compete for separate deposits across every venue.

Capital should not just sit on-chain. It should work where demand appears. That is the next challenge for DeFi liquidity - and one of the most important areas for the industry to solve.

Explore 1inch to access efficient routing across DeFi liquidity.