UNISWAP - Let's Take a Good Look 🔍REPORT:
Uniswap facilitates the trading of tokens on the Ethereum network along
with its scaling solutions such as Optimism, Arbitrum, and Polygon. The
protocol is recognized as a pioneer among decentralized exchanges
(DEXs), first for its popularization of the X*Y=K constant product pricing
curve of pooled liquidity in V2 — and subsequently for its concentrated
liquidity and staggered trading fee features in V3. The constant product
pricing curve has since been implemented across many other DEXs in the
industry. The concentrated liquidity model and fee tiers continue to remain
relatively unique across DEX applications.
Q2 was heavily impacted by fears of market contagion. First, the LUNA
ecosystem crashed when the UST stablecoin depegged. A few weeks later,
concerns around price mismatching between ETH and its staked
equivalent, stETH, began to abound. Funds with large exposure to both bets,
particularly Three Arrows Capital (3AC), faced heavy losses. When the
crypto community realized the risk of insolvency among funds and
affiliated centralized lenders, investment sentiment turned negative, driving
down the market capitalization of cryptocurrencies from over $2 trillion at
the start of the quarter to $870 billion by the end of Q2.
Although the larger cryptocurrency market capitalization decreased more
than 50%, Uniswap trading volumes were only down 8.7% compared to the
previous quarter. This relative success is partly due to volatility being
beneficial for DEXs: they represent foundational infrastructure to the crypto
economy, and users require their services when prices are volatile. Another
important factor is the activity of arbitrage bots in the system. When users
flush out of the market, bots can represent up to 75% of all trading volume,
which is a healthy sign. DEXs have matured in the last two years to the point
where activity is driven by price efficiency instead of pure retail speculation.
Supplied liquidity on the DEX held up better than the overall market
capitalization as well. Liquidity fell 37.1% in Q2, arguably “outperforming”
crypto asset prices. This benchmarking is important since liquidity on the
DEX is heavily impacted by the price of the underlying tokens. Even
benchmarked against ETH, liquidity still held up well in Q2. ETH fell almost
70% during the same time period. Part of the impact of liquidity holding up
can be attributed to stablecoins on the exchange, but overall, continued
yield-generating opportunities highlights the resiliency of blue-chip DEXs
like Uniswap as a vital service for a functioning DeFi ecosystem
Lower trading volume correlates with lower fees. Fees across all networks
were 21.9% lower compared to the previous quarter. However, Optimism
had a great quarter. Liquidity provider (LP) fees grew 146.9% from $1.4
million to $3.5 million over the last 90 days. A big boost came from the
much-awaited release of Optimism’s OP governance token. Other rollups
should take note of the effects of the airdrop: certainly in the short term,
attention shifted towards the L2, and transaction activity on the rollup saw a
large uptick.
Meanwhile, the largest decline of fees generated occurred in Arbitrum, the
other Uniswap L2 scaling solution. Fees fell 35.9% in the quarter down to $3.6
million. The end result is a much closer comparison between Arbitrum and
Optimism. Whereas fees earned on Arbitrum were four times as much as
on Optimism in Q1, the $0.1 million difference between the two in Q2 was
negligible, highlighting once again how impactful the OP airdrop was in the
L2 scaling wars. Whether Arbitrum launches a token — and how that
impacts trading on Uniswap — remains to be seen.
A gloomier macroeconomic environment, geopolitical uncertainty, and
institutional liquidation all contributed to one of the worst quarters in the
industry’s history. However, Uniswap’s continued facilitation of billions of
trading activity proves the decentralized exchange model is here to stay.
Now armed with an investment team and NFT marketplace aggregator,
Uniswap is strongly positioned to further root itself as a pillar of the crypto
economy.
also: Unpacking Uniswap’s ‘Fee Switch’
A governance vote could give UNI token holders a slice of the exchange’s transaction fees. So what’s stopping them?
I tend to prefer AAVE in this section of the crypto space...but that;s just an opinion.
One Love,
The FXPROFESSOR
