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Liquidity Risk Metrics

Liquidity metrics assess the concentration and distribution of liquidity across tokens, pools, and protocols. They quantify how easily capital can enter or exit a position without significant price impact.

Metrics Reference​

Nakamoto Coefficient​

The minimum number of liquidity providers (LPs) that collectively control more than 50% of the total liquidity in a vault or pool. Lower values indicate higher concentration risk — a single large LP exiting can materially destabilize the pool.

  • Range: 1 and above. Values of 1 or 2 are critically concentrated.
  • Used in: Ozone Market Risk scoring

Max Power Ratio​

The liquidity share controlled by the single largest provider. A pool where one address holds 70%+ of liquidity has a Max Power Ratio above 0.70.

  • Range: 0–1. Higher = more concentrated.
  • Used in: Ozone Market Risk scoring

Gini Coefficient​

Measures inequality in liquidity distribution across all LPs. Borrowed from economics — applies the same logic as income inequality to capital concentration.

  • Range: 0 (perfectly equal) to 1 (one entity holds everything)
  • Used in: Concentration risk dashboards

Herfindahl-Hirschman Index (HHI)​

Measures market concentration by summing the squared percentages of each LP's liquidity share. Widely used in antitrust economics; adapted here for DeFi liquidity concentration.

  • Range: 0 (perfectly distributed) to 10,000 (monopoly)
  • Interpretation: Below 1,500 = competitive; 1,500–2,500 = moderate concentration; above 2,500 = highly concentrated

Shannon Entropy​

Measures the diversity of liquidity distribution. Higher entropy means liquidity is spread across many providers — more resilient to individual exit events. Lower entropy signals concentration.

  • Range: 0 (complete concentration) upward. Maximum entropy depends on number of providers.

Theil Index​

Measures deviation from perfectly equal liquidity distribution. Decomposes inequality into within-group and between-group components. Values near 0 indicate even distribution; higher values indicate increasing concentration.

Total TVL (USD)​

The aggregate USD value of lender assets locked across all monitored pools at the latest snapshot. Used as the denominator for TVL-weighted yield calculations and as an absolute scale indicator.

Redemption Liquidity​

Accessible capital within a protocol that can be withdrawn or redeemed without significant slippage. Distinct from total TVL — measures exit capacity, not total deposits.

Daily Amihud Illiquidity​

The ratio of the absolute daily return (in USD) to the daily trading volume (in USD). Based on the Amihud (2002) illiquidity measure. Higher values indicate that small trades move prices significantly — a signal of thin, illiquid markets.

"The daily version of Amihud is the best daily cost-per-dollar-volume proxy." — Fong et al.

Example dashboard:

Liquidity Risk Metrics