We examine the effect of market efficiency on the efficiency of capital allocation in the setting of decentralized exchanges of crypto assets. Utilizing data on nearly 100 million trades in concentrated liquidity pools on two leading blockchains, we construct a highly granular, capital market-based measure of capital allocation efficiency. We also design and implement a method of identifying market-efficiency-restoring arbitrage transactions among all blockchain transactions
and construct arbitrage-based granular measures of market efficiency. We find that market efficiency has positive, economically and statistically significant, and causal impact on capital allocation efficiency.