Brief review: Uniswap’s initial liquidity mining reward period is from September 18th to November 17th. 20 million UNI was allocated to the liquidity provider for four trading pairs (5 million UNI for each trading pair)-ETH/USDT, ETH/USDC, ETH/DAI and ETH/WBTC.
At the current price of UNI, the value allocated is approximately US$70 million.
From this point of view, 20 million UNI is 2% of the UNI supply four years later and 13.3% of the initial supply. The initial supply at launch was 150 million UNI, which was allocated to traders and liquidity providers who had previously interacted with the agreement.
The rest is allocated as follows:
In the first year, 350 million UNI will be allocated to community funds, teams, investors and consultants. In the second year, this number will reach 250 million, then 150 million in the third year, and finally 100 million in the fourth year.
After the initial issuance is over, there will be 2% continuous inflation.
The community fund will retain 43% of the tokens, which are intended to be used for community grants, community plans and liquidity mining plans. The fund currently owns 137.7 million UNI, which is approximately US$500 million.
The first launch of UNI can be seen as a direct response to the parasitic behavior of other protocols (ie SushiSwap). In late August and early September, SushiSwap (mainly a clone of Uniswap) launched a “vampire attack”, which gave Uniswap liquidity providers an incentive to migrate in exchange for tokens.
Due to SushiSwap’s liquidity incentives, Uniswap’s liquidity began to build as expected, increasing from 300 million US dollars to 1.96 billion US dollars. Due to the parasitic behavior of another agreement, Uniswap’s liquidity began to increase. After the liquidity migration, Uniswap’s liquidity reached US$518 million on September 9th, a decrease of 73.6%. In contrast, SushiSwap’s liquidity increased from almost zero to $1.4 billion in a week.
This proves that liquidity providers are “mercenaries” chasing short-term incentives. If gains elsewhere (with or without subsidies and sustainability) are better, then liquidity will shift.
If the goal (or at least one) of the UNI token is to prevent liquidity migration, then it seems to have worked. Within a few days of starting liquidity mining, Uniswap’s total liquidity more than doubled to more than US$2 billion.
In addition, Uniswap distributes 400 UNI to each address, making it immediately one of the most widely distributed tokens. If it is not sold immediately, 90,000 addresses automatically own UNI worth more than $1,000 or 0.00004% of the agreement.
The third benefit is that it encourages many new liquidity providers to understand Uniswap and provide liquidity for the agreement. These liquidity providers profited from their initial investments and now have a better understanding of the risks and benefits of providing liquidity to automated market makers (AMM). After receiving the reward, these liquidity providers are more likely to comply with the agreement.
Community plan
With the completion of the liquidity mining rewards, an obvious question remains: What should be done next? The Uniswap community controls a large treasury worth $500 million and can allocate funds to continue to promote the development of the agreement.
Any governance proposal requires 4% of the voting rights or the support of 40 million UNI, and a majority of votes are required to pass. 10 million UNI is required to submit a proposal.
There are now two main proposals that can continue to be distributed:
Rewards continue at the same level in each pool, but only for ETH/WBTC and ETH/USDT pools. This is a suggestion made by Robert Leshner, the founder of Compound. It is worth noting that the UNI owned by Compound ranks fourth, with 13.2 million UNI, enough to submit proposals.
Cut the reward in half, but keep it the same. This is driven by some active community members. This proposal is the most prominent proposal and has become the focus of community discussion. These have always been the main places for community governance.
The main arguments for continued distribution are:
Liquid mining helps to distribute UNI to the community and is useful for further decentralization of ownership and governance.
UNI is distributed to users who provide value (ie, provide liquidity) to the agreement. This aligns future ownership with valuable users.
The incentive pool will remain one of the most liquid decentralized exchange (DEX) trading venues, resulting in competitive prices.
Currently, community member-driven voting has passed the initial popularity check, and then passed the consensus check on the Uniswap snapshot page. The purpose of the initial heat check is to determine whether there is enough interest in changing the status quo (currently there is no liquidity mining reward), while the consensus check revolves around a formal proposal to discuss.
After passing these steps, a formal governance proposal will be submitted. The voting period is 7 days. After a two-day time lock, the code in the proposal will be executed. Currently, the proposal to be voted on is being formulated.
Transaction volume analysis
More interesting is some data.
The liquidity mining reward just ended more than ten days ago, and it is difficult to explain the long-term impact of the disappearance of liquidity. The amount of DEX has fluctuated greatly during Uniswap’s liquidity mining period, and it is difficult to predict what might happen and what will happen.
Starting from the last week of August, DEX trading volume surged, and the trading volume peaked in the first week of September. During this period, the average daily trading volume of DEX was $842.3 million. Since then, the trend line has been in a downward state (except for an anomalous incident on October 26, due to hacking). The 7-day period from October 18 to 25 was the lowest, at $434.9 million.
Since the last week of October, transaction volume has grown steadily, but it is still 22.5% below the peak since Uniswap’s liquidity mining ended.
To illustrate this point in the Uniswap timeline, there was a peak transaction volume two weeks before the start of liquidity mining, and most of the time for liquidity mining was during the period of decline in transaction volume. In the two weeks before the end of liquidity mining, the average daily transaction volume was $294.6 million. Since then (within two weeks), it has reached 363.3 million US dollars.
Two weeks before the issuance, liquidity rapidly increased from 300 million US dollars to 1.9 billion US dollars, and the transaction volume also increased. It coincides with the peak transaction volume and the most active time for liquidity mining.
It is worth noting that as liquidity increases, transaction volume decreases, and vice versa. Uniswap’s trading volume (at least in the short term) is on the rise.
Similar effects can be seen in the subsidized pairs of USDT, USDC, DAI and WBTC. This does not mean that additional liquidity is of no avail, but it does mean that liquidity mining is not required to support existing or even higher transaction volumes.
The WBTC/ETH pair has the highest correlation between liquidity and trading volume, but at least for the first fourteen days after the end of the reward, the trading volume has been flat with the trend line.
If users check the share of transaction volume from the subsidy pairs in Uniswap, there will be a significant change of about 37% to ~50% after the start of liquidity mining rewards.
This will indicate that due to additional liquidity, the currency pair may have received some additional trading volume. Since the termination of the subsidy, the market share of the above four pairs of products has remained relatively stable.
At the same time, the share of liquidity from subsidized currency pairs increased from 30% to 75%, an even more significant increase. If additional transaction volume is achieved, a lot of liquidity is required.
The transaction volume data may be noisy, and it is difficult to distinguish the original natural growth from the impact of liquidity rewards. However, trading volume peaked before liquidity mining, and the trend line has been rising since the end.
A simple test to measure the effectiveness of liquidity mining rewards is to look at the impact on market share.
In this regard, Uniswap has not lost any advantages. In the first one and a half months, during the UNI award period and the following two weeks, the market share remained unchanged.
In contrast to Uniswap’s indicators, SushiSwap’s trading volume and liquidity seem to be directly related. SushiSwap has grown to become the third largest DEX (in terms of transaction volume), reaching a market share of 11.8% in November.
Mining
In order to combine the transaction volume analysis, the most benevolent explanation is that UNI rewards have less impact on overall trade volume. According to the data, the impact of market cycles on transaction volume seems to be far greater than incentive measures.
This led to the first major criticism of liquidity mining rewards. First, the plan will not affect the actual market share and volume. This happens in multiple ways:
Compared with other agreements, Uniswap’s own market share remains unchanged.
A small increase in the relative volume requires incentives, which greatly changes the liquidity share of a particular currency pair. For this $65.4 million bonus, it is almost invisible from the chart.
The strength of Uniswap
A larger argument against subsidies is that due to the immediate drop in liquidity, token rewards do not appear to have a defensible network effect. Liquidity providers are mercenaries and they will pursue the best possible returns, whether it comes from Ponzi-like economics or from sustainable cash flow. Once the incentives disappear, liquidity disappears.
In addition, a large number of liquid miners tend to sell quickly rather than become long-term holders. This can be seen from the relative price performance of UNI compared with other projects during the liquidity mining period. For large sums of money, UNI allocates wasted marketing expenses.
Constantly trying to use tokens to eliminate all other protocols is a failed game. If DeFi goes beyond the current cryptocurrency bubble, competition will only intensify-SushiSwap’s vampire attack may not be the final or most radical iteration of this behavior. There must be more ways to establish the sustainable advantages of the agreement.
To be fair, there is actually an opposite of this in the data.
Since the start of the reward, the number of liquidity providers has doubled. The funds fled, but many users did not. Now, the average liquidity provider is smaller, which indicates that the whale has left. This has some value-it may not only be the exact dollar figure that each user currently contributes.
Many users have joined Uniswap liquidity regulations due to incentives, and may have learned a lot about how to interact with the protocol since then. It can be said that so far, most potential liquidity providers that were originally interested have been attracted-if the number of DeFi users soars, this strategy may work again in the future.
There is a broader view here, that is, Uniswap’s advantage lies in quantity. So far, Uniswap has the most users among encryption protocols and is completely different from other protocols.
In the past week, Uniswap’s transaction volume was 5.8 times that of Curve, but its users increased by 69.8 times.
Uniswap has made great strides in providing liquidity comparable to centralized exchanges. For example, according to Coingecko’s USD (T/C) to ETH swap, a market order of 2.9 million USD will cause a 2% decline. On Coinbase Pro, a 2% market change is only $385,000.
On the contrary, regardless of the amount of liquidity, some markets are currently difficult to compete with Uniswap (at least until v3 arrives). One million USDC and DAI transactions resulted in a 2.8% slippage and a 0.6% fee. On Curve, the slippage of the same transaction is almost zero. This is because Curve is optimizing the exchange of stable-price assets between each other (for example, the exchange of stable coins to stable coins). Although this brings some structural risks, it also has benefits.
In addition, over-the-counter trading desks will still be able to provide the best prices for very large transactions of major assets.
Most Uniswap transactions are so small that sliding does not work. Based on 60,000 ETH/USDT transactions, the percentage of transactions that exceed the U.S. dollar threshold is:
$100k, 0.73%
$10k, 7.4%
$1k, 35.1%
$100, 81.3%
in conclusion
People can look at the graphs all day and come to the conclusion that it is difficult to say what the value of the liquidity mining reward is and what it will be in the future.
From historical data, if the goal is to obtain transaction volume and market share, it is not clear whether the current monthly subsidy of 20 million US dollars is reasonable. Total value lock-in is a vanity indicator, the important thing is the number and number of users.
At the end of the four-year vesting period, the community fund pool will have 460 million UNIs, of which 5 million spending means 92 months of operating time. To be fair, this is not crazy spending.
In addition to competition, the added value of UNI rewards is that it means allowing valuable users (liquidity providers) to develop the agreement, and the overall distribution of ownership will make the foundation more decentralized.
If the goal is to decentralize the distribution of ownership, then before rewarding agreement users, we should probably look further into the future. After all, the crypto and DeFi communities are mainly composed of a small group of enthusiasts. The current pre-allocation actually runs counter to the goal of wider distribution.
Fixing the reward to four pairs will also have some adverse effects. UNI rewards cannot be expanded with demand, and there is an artificial tipping point. The price of introducing a new token is that it will create governance conflicts. Essentially, holders of UNI tokens are selecting “winners” from the available tokens.
It is easy to see that this will end in a sacred war, and any programmatic attempt to measure demand can be manipulated by laundering transactions.
Even below this line, subsidizing trading pairs for tokens like WBTC can be said to have strategic value. If this is the case, there should be a better reason to prove that it is necessary than anecdotal evidence that the subsidy will actually work.
In general, the strategy of how to use Treasury bill rewards in the future should focus on establishing sustainable advantages (network effects). The open question is that this may be a prudent approach to holding assets other than UNI in terms of financial management. If there are useful new tools and development ideas to fund it, 20 million US dollars per month will be quite large. reserve.
The crux of the problem is that it is a waste of US$20 million per month on liquidity mining (the value of retention thereafter is questionable) compared to spending money on a long-term moat. As an open issue, the community should consider the potential impact of wisely investing in the treasury. For example, by issuing grants to build products for institutions to better participate in DeFi, application sets, developers, and analysis tools. If we just use it as a one-million-dollar reward to the user who came up with the best idea in January, then this in itself can generate a 10-fold return on investment.
The Uniswap community can actually run a $1 million developer grant program per month to build applications on Uniswap, and the amount spent is one twentieth of the total cost. In contrast, liquid mining is generally considered an expensive customer acquisition plan and excessive marketing expenses. Uniswap itself started with a $100,000 grant from the Ethereum Foundation.
All in all, doing nothing is not necessarily considered negative. In the absence of Uniswap recently, Uniswap’s recent sales have shown positive growth, and its market share has not declined. Doing nothing just means allocating resources when there is a better reason.
At this point, we don’t even know what the protocol will look like when v3 is launched-this information will definitely change the analysis of where resources are allocated. Compared with any advantages gained through liquidity mining, the v3 upgrade has the potential to increase the value of Uniswap to large traders to a greater extent. Unlike subsidies, this advantage still exists.
Don’t rush to burn money now. If Uniswap succeeds, it will be a ten-year journey to the finish line. During this period, there will be a large number of parasitic competitors to thwart it, and there are reasons to incentivize specific capital pools and opportunities to obtain capital.
