How Does the Withdrawal Period of Optimistic Rollups Affect Decentralized Finance (DeFi) Liquidity?

The withdrawal period, or challenge window, creates a time delay, typically 7 days, before funds can be moved from the Layer 2 back to Layer 1. This delay locks up capital, which can negatively impact DeFi liquidity and capital efficiency.

To counter this, "fast withdrawal" services have emerged, where a third-party liquidity provider pays the user immediately on Layer 2 in exchange for the locked funds on Layer 1 once the challenge period expires.