Injective 🥷 (@injective): Injective introduced the concept of Liquidity Availability this month-a paradigm shift that will change on-chain liquidity.

Injective introduced the concept of Liquidity Availability this month-a paradigm shift that will change on-chain liquidity. This new model rethinks liquidity from the ground up from a network level. But what is Liquidity Availability? Liquidity Availability refers to the ability to meet the liquidity requirements needed to ensure the successful execution of a transaction at any given moment given a particular set of bounded constraints. At the application level, Liquidity Availability is primarily driven by Application-Specific Liquidity, which is liquidity confined within a particular dApp and cannot be repurposed for other uses. This constraint occurs in two key ways: Network-Level Isolation: The liquidity within a dApp cannot be leveraged by other applications within the same network to power processes aside from its specific use case (e.g., asset pair swaps), leading to fragmentation across the ecosystem. Intra-Application Constraints: Even within a single dApp, liquidity is often locked into specific pools for singular functions, such as a liquidity pool for ETH/BTC swaps. This means that the application cannot repurpose or leverage this liquidity for other use cases within its own system, which limits its flexibility and decreases capital efficiency. Applications must attract asset deposits from liquidity providers (LPs) into designated repositories, typically smart contracts, each of which facilitate only specific transactions. Common examples include liquidity pools for asset swaps, lending protocols for overcollateralized loans, insurance pools for protocol backstops, staking pools for liquid staking derivatives (LSDs), etc. This in and of itself is a form of liquidity fragmentation, which is compounded in multichain applications, where liquidity is also spread across multiple networks. Therefore, Total Value Locked (TVL), often used as a measure of a dApp's liquidity, does not accurately reflect Liquidity Availability. TVL aggregates the total liquidity deposited within an application, which may be significantly fragmented across various use cases and therefore not fully accessible for broader transaction needs. However, within the current system, it can serve as a rough estimate for application-application comparisons in certain situations. Currently, at the network level, Liquidity Availability is still constrained within individual applications. This means that a network cannot leverage the total liquidity housed across its ecosystem of dApps to improve overall Liquidity Availability. As such, application-specific liquidity remains the primary driver. Due to this, interoperability solutions have been the industry’s primary focus for enhancing Liquidity Availability. Various techniques have been explored, such as cross-chain liquidity aggregators, unified liquidity pools, atomic swaps, liquidity routing pools, and tokenized liquidity bridges. While these efforts have led to some marginal improvements in Liquidity Availability, liquidity still remains increasingly siloed within applications.