Capital Fragmentation Risks

Capital fragmentation occurs when liquidity is split across multiple versions of a protocol, reducing efficiency and increasing costs for users. This often happens during migrations, where some users move their funds to a new contract while others remain in the old one.

Fragmentation can lead to higher slippage in trading, less competitive lending rates, and overall lower protocol utility. It also creates security risks, as fragmented liquidity may be easier to manipulate or exploit.

Managing this risk requires clear communication, strong incentives, and tools that help users migrate their capital easily and safely.