Liquidity Optimization in Crypto: Navigating DeFi's Future

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One Click crypto provides an overview of capital efficiency within DeFi. Examining the benefits that liquidity optimization brings and how it will be integral for DeFi moving forward. Outlining the increasing role of AI and DeFi robo-advisors.

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Danail Velchovski
February 8, 2023
Feb 8

Liquidity is the lifeblood of any financial service, and a lack of liquidity opens the path to systemic risk. One skill TradFi has honed since its inception is liquidity optimization. Regardless of the lack of transparency, prior operational failures (2007 sub-prime mortgage crisis), and rampant fraud, on the whole TradFi has gotten pretty good at optimizing liquidity.

And now DeFi has begun to move in the same direction.

The fallout from the 2008 financial crisis introduced regulations relating to liquidity, mandating that TradFi institutions had to have pre-defined liquidity and capital requirements to prevent systemic failures in the event of panic.

However, moving away from the worst-case scenario, liquidity optimization will be integral for DeFi to move forward. Liquidity-optimization issues have been exacerbated by the fragmented nature of DeFi, with liquidity locked on different chains, and investors who want to hop from one chain to another must risk using a bridge.

Vitalik long ago warned of the dangers of bridges that traverse ‘zones of sovereignty,’ and retrospectively, he was proven right. Bridge exploits were the leading cause of fund losses in 2022.

Optimizing liquidity becomes even more critical when capital already exists in fragments.

What Is Liquidity Optimization?

Optimizing liquidity in DeFi translates, in laymen’s terms, to make the best use of the money currently available. Markets thrive on efficiency and love optimization. More efficient capital naturally frees up capital and reduces cost. This saved capital can be utilized elsewhere, helping to speed up the overall growth capacity of DeFi.

Defi Liquidity Optimization 1.0: The Pioneers

A highly simplified example of liquidity-optimization implementations would be utilization-driven lending APRs.


Interest rate model for USDC on Aave

Aave calculates supply APRs and borrow APRs from the utilization rate. When pools have a low utilization rate, the supply APRs will be low, encouraging users to deposit a different asset or allocate their capital more productively elsewhere. When utilization rates are high, the supply APR rapidly increases, and the cost of borrowing rapidly increases.

This avoids 100% utilization rates. If utilization reaches 100%, no assets remain in the pool, users cannot take loans, and the lending pool no longer functions. High-supply APRs encourage investors to deposit, and high-borrow APRs encourage investors to repay their loans. These incentives optimize liquidity allocation.


Uniswap’s positive feedback loop related to liquidity helps to outline the greater benefits liquidity optimization can bring to DeFi.

Uniswap improves liquidity efficiency and reduces slippage. Reduced slippage makes it more attractive to traders. Thus more trades are made, which increases trading fees encouraging more investors to supply liquidity to the pool. This deepens liquidity, helping to reduce slippage further. Thus trading becomes more attractive, ad infinitum.

Supplying concentrated liquidity for ETH-USDT pairing on Uniswap

Uniswap V3 deployed on the Ethereum mainnet in May 2021 and introduced the concept of concentrated liquidity. This update massively bolstered liquidity efficiency and allowed users to provide liquidity within a defined price range.

In V2, liquidity providers distributed their capital uniformly along the price curve from zero to infinity. But given assets typically trade in a narrow price band, the capital was highly inefficient. In V3, liquidity providers can concentrate their capital within ranges where most trading occurs, earning similar swap fees with less capital at risk.

This concentrated liquidity also encourages deeper liquidity in the trading band, further reducing slippage and allowing Uniswap to compete with the trade efficiency of centralized exchanges.

This optimization gave liquidity providers greater freedom of choice. They could increase their deposit within the range to earn greater fees, gain market exposure through holding different assets, invest in other areas of DeFi, or hold onto their capital. Liquidity optimization encourages freedom.

Defi Liquidity Optimization 2.0: Yield Optimization Parallels

Uniswap introduced liquidity optimization at the protocol layer. Individual investors can implement liquidity optimization on a personal level. When all active agents tend toward liquidity optimization, naturally, the whole shifts in this direction. Uniswap undertook liquidity optimization to improve its service and therefore increase its revenue. Investors should do the same thing with their portfolios and optimize their available capital to make it as productive as possible.

DeFi Yield Aggregators

DeFi yield aggregators surged in popularity, given their ability to automize the earning process and make it more efficient. One of the pioneers and a superstar of DeFi Summer 2020 was Yearn Finance, released in July 2020.

One of the earning strategies contained within the USDC vault on Yearn Finance

Yearn Finance, developed by Andre Cronje, optimized the earning process within DeFi. It began with stablecoins, and the protocol automatically moved stablecoins to the pool/ protocol offering the best yield. Featured above is one of the strategies for generating a yield on the USDC stablecoin.

Vaults changed the earning process by introducing automated strategies. Investors deposited their assets and waited to accrue yield.

Vaults on Beefy Finance

Beefy Finance launched in September 2020, and this cross-chain yield optimizer rapidly became a favorite amongst DeFi enthusiasts. Beefy expanded the offerings and similarly introduced a vault system. One of the most basic and popular strategies is LP vaults. Beefy harvests the yield and creates more LP tokens. This auto-compounding boosts yield over a longer time frame and often relatively significantly.

Yield aggregators introduced a new level of efficiency to DeFi investing, and their enormous popularity acts as a testament to their effectiveness. However, vaults remain fundamentally limited. Vaults can only optimize a pre-selected strategy with given assets, they cannot select the best overall strategy, and this responsibility rests on the shoulder of the investor. With the constant flux of DeFi, this can prove challenging to even experienced crypto users.

Defi Liquidity Optimization 3.0: The Role of DeFi Robo-Advisors

Introducing DeFi robo-advisors. DeFi robo-advisors mark the next technological step following vaults and yield aggregators. They allow dynamic rebalancing and can be considered a vault of vaults at a high level, but crucially they remain non-custodial.

Homepage of One Click Crypto

One Click Crypto has built a DeFi robo-advisor pushing forward what is possible regarding liquidity optimization and DeFi investing. Time is a precious resource and presents the greatest hidden gain of using a DeFi robo-advisor. One Click’s robo-advisor maps a user’s on-chain history to build a risk profile of the investor. Additionally, the user submits information, including investment targets, to create a more nuanced risk profile.

Typically within DeFi, users begin with little to no risk aversion drawn in by high inflationary yield APRs or do not fully grasp what they allocate funds to. As time progresses, investors normally become more risk-averse after being burnt by impermanent loss or bag-holding valueless native farm tokens. One Click’s robo-advisor scans the past and acquires present/ future information to ensure that the risk profile aligns with the investor’s current goals.

One Click Crypto’s DeFi robo-advisor strategy

One Click’s robo-advisor then creates a fully customized portfolio of DeFi yield protocols, and users can enter the pool through their wallet. One Click’s robo-advisor will periodically suggest portfolio rebalancing, allowing investors to reallocate their capital to the best-performing pools. The robo-advisor also factors in external conditions such as market sentiment and current trends to further optimize strategies. It features cross-chain routing meaning investors’ assets roam free in DeFi, able to search out the best yields on any chain in alignment with their long-term goals.

In the same way that DeFi yield aggregators rose in popularity for DeFi investing, DeFi robo-advisors will similarly climb. This will be driven by two factors: simplicity & optimization.

Regarding simplicity. Keeping track of a portfolio can be challenging, and keeping track of multiple DeFi strategies can absorb a tremendous amount of time. The market prizes efficiency hence its natural swing toward liquidity optimization. Robo-advisors allow for greater levels of efficiency than humanly possible and constantly adapt to incoming data. Robo-advisors streamline DeFi investing into a single interface and make DeFi investing more straightforward and profitable.

Regarding optimization. Manual portfolio rebalancing becomes increasingly less tenable with the increasingly fragmented nature of DeFi yields. Robo-advisors route liquidity to the most effective pools and therefore optimize liquidity distribution throughout DeFi allowing users to optimize their own time searching for more macro narratives, such as the suspected incoming swell of GameFi, or utilize this time in another aspect of their life. Crypto sucks investors in, and often these investors spend their time inefficiently. DeFi yield optimization allows them greater exposure with less time invested, similar to obtaining greater swap fees from supplying liquidity within a given price range.


The world is entering a terrific age of artificial intelligence, where the data economy wrestles with privacy. Early adopters tend to be rewarded, and DeFi robo-advisors mark the next leap forward for DeFi investing. Investors that optimize will outpace the majority, and the compounding effects of optimization will grow over time.

One Click’s robo-advisor farms effectively across sixteen chains, dynamically rebalances investors’ portfolios and routes assets where they need to be to be used most effectively. And all of this whilst the investors retain full custody of their assets.

DeFi robo-advisors take part of the burden allowing investors to focus on things more important, safe in the knowledge that their capital currently works away at its maximum potential. Automation will benefit DeFi more broadly as liquidity will funnel naturally to where it is needed by following financial incentives.

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Danail Velchovski

Danail masterfully combines his deep knowledge of blockchain technology and his strong writing skills to deliver crisp, comprehensive content. With his early immersion in the web3 domain, he navigates the complexities of this revolutionary technology with ease, turning intricate concepts into engaging, digestible pieces. His research acumen and keen insight into the rapidly evolving world of decentralized networks make him an invaluable asset in educating audiences about web3's potential and its ever-evolving landscape.

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