Definition ∞ High capital efficiency refers to the ability of a system or strategy to generate substantial returns or utility with a relatively small amount of underlying capital. In decentralized finance, this often applies to liquidity protocols that allow users to earn significant fees or rewards from their deposited assets. It indicates an optimized use of resources to achieve desired outcomes. This metric is crucial for assessing the performance of financial mechanisms.
Context ∞ Reports often highlight high capital efficiency when evaluating new DeFi protocols or liquidity provision strategies. It is a key selling point for innovative financial products that promise greater returns on investment. Debates frequently consider the trade-offs between capital efficiency and associated risks, such as impermanent loss or smart contract vulnerabilities.
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