Fluid: A new DeFi standard to unify DEX and lending

About Fluid

Since 2018, Instadapp has been one of the key teams contributing to the development of decentralized finance (DeFi), notably by building optimization layers on top of major protocols like MakerDAO, Aave, and Compound. Through its flagship products (Instadapp PRO, Avocado Wallet), the team has aimed to improve user experience without altering the underlying protocols.

With Fluid, Instadapp has taken things to the next level: no longer just middleware, but a foundational infrastructure for DeFi. Launched in October 2023, Fluid is the culmination of the team’s years of experience building over other DeFi applications.

The ambition is to solve one of DeFi’s core structural problems: liquidity fragmentation. To do this, Fluid proposes a different model — a shared liquidity pool that powers multiple specialized applications simultaneously. This architecture, called the Liquidity Layer, is designed to aggregate liquidity across several interconnected financial services.

In this way, Fluid aims to create a kind of “universal financial layer” on which multiple applications (spot, perps, lending, borrowing, stablecoins, RWAs…) can interoperate.

This vision clearly echoes that of Hyperliquid, where the HLP provides liquidity for the Perps DEX and where other Vaults could eventually plug into DeFi apps on HyperEVM.

In October 2024, Instadapp launched Fluid DEX v1, a decentralized exchange introducing two key innovations: Smart Collateral and Smart Debt. In just three months, Fluid DEX became one of the fastest-growing projects on Ethereum, ranking as the second-largest protocol of its kind after Uniswap.

On April 25, 2025, Instadapp announced the launch of Fluid DEX v2. The team describes it not as a simple upgrade, but as a complete reinvention of the decentralized exchange sector.

In this analysis, we’ll first revisit the first generation of Fluid products (Liquidity Layer, Lending, Vaults, DEX v1) before diving into the technical overhaul introduced by Fluid DEX v2.

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Fluid: A Unified Liquidity Layer

Liquidity Layer

The Liquidity Layer is the core of Fluid’s architecture. It acts as a shared base layer for all the protocols built on top of it — including Lending, Vaults, DEX, and potentially other applications.

All protocol flows pass through this single layer, which centralizes liquidity. This means that when a user moves from one protocol to another, their funds remain within the Liquidity Layer — no need for withdrawals or migration. It allows new applications to launch without fragmenting liquidity.

• Automated Ceilings

Security is the primary concern for any protocol. DeFi applications have implemented various safety mechanisms (caps, exposure ratios, etc.) to minimize losses in adverse scenarios — but these often require active management. The Liquidity Layer provides structural safety at the base layer.

It includes a system of automated ceilings that dynamically adjust debt and collateral limits at each block. These limits act as native firewalls that can throttle large withdrawals or risky loans in the event of a bug, an attack, or unstable positions. This ensures operations continue normally while blocking abnormal behavior, giving governance multisigs time to intervene if needed.

From a technical standpoint, the Liquidity Layer is minimalist: it’s a simple smart contract with no complex logic. It only stores assets and validates supply/borrow/repay/withdraw operations. All the intelligence (rate calculations, risk management, strategies) lives in the modules built on top, which helps reduce systemic risks.

Note: The more critical a protocol or asset becomes within Fluid, the higher its supply/borrow ceiling. The idea is that launching a new protocol doesn’t add systemic risk to the Liquidity Layer.

Lending Protocol

The first functional module deployed on Fluid addresses the most basic use case in decentralized finance: Lend & Earn. It allows any user to deposit assets into the Liquidity Layer and earn yield — with no complex commitments or active position management.

The basic insight is that there are 2 to 5 times more lenders than borrowers on most traditional lending protocols. To address this imbalance, Fluid eliminates the technical complexity of borrowing by offering a deliberately minimalist model: deposit, let it run, and earn sustainable yield.

Thanks to Fluid’s unified structure, deposited funds can automatically benefit from new deployed features (better rates, new strategies). Moreover, they are pooled with funds across all other modules (Vault, DEX, etc.), which mechanically improves liquidity and stabilizes interest rates.

Note: The Lending Protocol is ERC-4626 compatible, making it trivial for third-party apps to integrate Fluid’s lending system into their own strategies (vaults, aggregators, interfaces, etc.).

Vault Protocol

The Vault module is Fluid’s most advanced component. It is primarily designed for borrowers and offers major advantages in terms of capital efficiency, yield optimization, risk management, and user experience — all while enabling access to Fluid’s smart collateral and smart debt features (covered below).

The Vault Protocol can be seen as a hybrid between MakerDAO’s vaults and Aave’s lending markets, since users earn yield on their collateral.

• Improved LTV

Before diving into the Vault Protocol’s liquidation mechanism, it’s essential to understand its impact on LTV (Loan-to-Value) — that is, a user's borrowing capacity relative to their collateral.

Liquidations are crucial to a protocol’s safety. Today, there are two ways to improve it: lowering LTV (which reduces user utility) or improving the liquidation engine’s performance.

Fluid chose the latter by introducing a high-performance liquidation mechanism, allowing users to borrow up to 95% of their ETH deposit’s value without compromising security. Here's how it works:

• Liquidation Engine

The Liquidation Engine is the backbone of Fluid’s Vault Protocol. It draws inspiration from Uniswap v3’s tick logic and, according to the team, offers a 100x efficiency improvement over traditional protocols.

In simple terms, it allows multiple positions to be liquidated simultaneously within the same LTV “range,” rather than one by one — drastically reducing cost and user penalties:

• 3–4x lower gas fees compared to standard DeFi protocols
• Approximately 5% of debt liquidated (vs. 50–100% elsewhere)
• 5–10x less user loss during liquidation
• Liquidation penalty reduced to 0.1% (vs. 5–10% elsewhere)
• Very limited systemic market impact (fewer forced sales)

The system categorizes positions into LTV ticks. Once a threshold is breached, all users within that tick are liquidated in a batch. These batches are then injected into the DEX as trading opportunities for liquidators, improving absorption.

See the official documentation introducing Fluid

Fluid DEX v1

Launched in October 2024, Fluid DEX v1 is the first DEX to be fully integrated into a lending infrastructure. It’s built around the idea that both collateral and debt positions can be reused as liquidity within other Fluid modules:

• Smart Collateral: Collateral deposited by users isn’t simply locked (as with Maker or Aave). It’s deployed into the Liquidity Layer and used as active liquidity on the DEX, allowing users to earn both interest and trading fees.
• Smart Debt: Borrowed funds are likewise injected into the DEX’s liquidity pools. The swap fees generated are used to reduce the user’s outstanding debt — and in some cases, fully offset their interest payments.

The logic is reversed: on Fluid, debt becomes a productive asset. Users might even get paid to borrow if Smart Debt fees exceed their borrowing costs.

By aggregating both collateral and debt as active liquidity, Fluid DEX v1 reaches unprecedented levels of capital efficiency. On some trading pairs, up to 39x the real TVL can be used as effective liquidity.

Example: The USDC/USDT pool reached $62M in usable liquidity, composed entirely of Smart Debt-based borrowing.

In January 2025, Fluid DEX overtook Uniswap’s ETH/USDC pool in volume — without any token incentives and with just $6M in TVL. A clear demonstration of the Smart Collateral / Smart Debt model’s potential.

See the official documentation on Fluid DEX v1

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Fluid DEX v2

Fluid DEX v1 quickly became the fastest-growing decentralized exchange, surpassing $10 billion in cumulative volume in just 100 days. It also became the second-largest DEX on Ethereum, trailing only Uniswap.

Announced in April 2025, Fluid DEX v2 is not just an upgrade — it’s a leap forward. It introduces a complete platform for building customizable decentralized markets, embedding all the core pillars of on-chain finance: lending, DEX functionality, oracles, liquidation engine, and smart contract accounts.

A Modular, Permissionless Architecture

With Fluid DEX v2, any developer can now deploy a custom DEX instance directly on top of the Liquidity Layer. Each DEX operates as a standalone deployment, with:

• Its own pool logic (V2 AMM, V3, CLAMM, stableswap, etc.)
• Its own fee structure
• Customizable price ranges (if applicable)
• Independent rules for managing collateral and debt

This permissionless framework allows experimentation with new economic models — or replication of proven ones — without re-implementing the entire stack. For example, one project could create a Curve-like DEX, while another mimics Uniswap V3 behavior, all benefiting from Fluid’s capital efficiency and security.

Technical Note: Each DEX is deployed using the “CREATE” opcode, meaning its instance is referenced via a simple dexId rather than a standard Ethereum address. This optimizes gas costs, simplifies indexing, and allows DEX addresses to be predicted pre-deployment.

Capital Efficiency

The major innovation of DEX v1 was using both collateral and debt as active liquidity, thanks to Smart Debt and Smart Collateral. With DEX v2, this logic becomes even more powerful. LPs can now:

• Select custom price ranges (à la Uni V3)
• Allocate portions of their position as Smart Collateral or Smart Debt
• Set different price bands for each leg of the position
• Automate strategies with Hooks (e.g., hedging, arbitrage, stop-loss)

For example, a user can deploy an ETH–USDC liquidity position where:

• The ETH leg is funded by collateral from a Vault
• The USDC leg is borrowed as Smart Debt
• Each leg is positioned in a different price range
• A Hook auto-triggers exit if the position becomes too risky

Fluid DEX v2 thus becomes a full-fledged market-making strategy engine. A single smart contract can encompass execution logic, risk management, yield optimization, and strategy composition.

Embedded DeFi Primitives

Whereas platforms like Uniswap and Curve had to externalize key components (liquidations, vaults, oracles, etc.), Fluid DEX v2 natively integrates them into each DEX instance. Every deployment of Fluid DEX v2 comes with:

• Built-in lending logic, directly connected to the Liquidity Layer
• Seamless access to the shared Liquidation Engine used across Vaults
• Dynamic TWAP oracles and slotted pricing, with impact control
• A Hooks system to automate complex strategies

These components make Fluid DEX v2 not only a spot trading platform, but a foundation for advanced use cases that were previously difficult to implement, such as:

• Multi-asset hedging within a single DEX
• Cross-asset deployment of collateral/debt across pairs
• Directional market-making: long legs funded by collateral, short legs by debt
• Automated logic via external Hooks based on volatility, oracle pricing, or health factor triggers

In this model, LPs evolve from passive liquidity providers to full-fledged portfolio managers, with built-in leverage, risk protection, entry/exit conditions — all native to the DEX itself.

A New Vision for Fluid

With this v2 release, Fluid is no longer just a performant DEX — it becomes a protocol creation framework, unified around the Liquidity Layer. Whereas early DeFi fragmented key functions across separate protocols, Fluid is betting on an integrated, modular, and programmable architecture.

This marks a paradigm shift that may inspire a new wave of protocol development. That’s precisely Fluid’s goal: enabling any developer to deploy a custom DEX with its own economic logic, turning Fluid into a full-fledged app layer for DeFi.

We could soon see new applications emerge on top of Fluid, such as:

• A stableswap DEX optimized for RWAs, combining real-world yield and dynamic pegging
• A long-tail asset DEX with higher fees and automated vault-managed liquidity
• A fully cross-chain DEX with debt borrowed from external networks via Avocado

Read the official announcement for Fluid DEX v2