Looking at ETH2-FLI liquidity from a product point of view.
TLDR
- EHT2-FLI has continual unit supply growth
- Liquidity in $ AUM grew during the Bull market but has shrunk during the current Bear.
- Liquidity in terms of the number of ETH2-FLI available to purchase has continued to increase.
- From a product point of view, I’m not seeing a need to start liquidity mining ETH2-FLI liquidity on L1.
Ok, the FLI products are very different to DPI and MVI, they are designed to be traded and only held for short periods.
As they have fewer components, the issue gas costs are much lower (~540 k for ETH2 vs ~1,800 k for DPI ) (although FLI has an added issue/redeem fees).
ETH2-FLI was launched with a cap on units which was rapidly reached and the cap raised. This rapid growth of AUM and liquidity mean that the planned liquidity mining for ETH2-FLI was put on hold.
ETH2-FLI AUM and supply
An initial observation is that while the AUM shows a pretty wild ride with AUM peaking over $120 M:
The number of circulating tokens continues to increase.
[personally, I’m a little surprised by this as I would expect redemption of ETH2-FLI in a bull market to avoid volatility decay which affects leveraged contracts/funds]
DEX liquidity
There is currently significant liquidity and trade volume on both Uniswap v2 and v3. Note, I’m not familiar with Uni v3 analytics, so I’ll compare the data from Uniswap, and look and v2 using Dune
| 27jun21 | Unit | Uni v2 | Uni v3 |
|---|---|---|---|
| AUM | Million $ | 4.62 | 6.15 |
| 14 day average trade | Million $ | 1.96 | 4.26 |
| 14 day average fee | $ | 5,867 | 12,765 |
| Annualised average fee income | % | 46% | 76% |
| ETH2-FLI in pool | # ETH2-FLI | 43,375 | 97,530 |
| ETH in pool | ETH | 1,269 | 530 |
| ETH2-FLI in pool | $ M USD | $2.4 | $5.3 |
| ETH in pool | $ M USD | $2.3 | $1.0 |
| Sell ETH for 1% price impact | ETH | 9.0 | 20.0 |
| Buy ETH for 1% price impact | ETH | 9.0 | 24.5 |
| Sell ETH for 2% price impact | ETH | 22.2 | 54.0 |
| Buy ETH for 2% price impact | ETH | 22.2 | 51.0 |
One key consideration is that, unlike v2, v3 liquidity is not symmetrical, so price impact can not be easily calculated. For example, at the moment, the v3 pool has much more ETH2-FLI locked ($5.2 ) than ETH ($1.0 M)
Even so, it’s clear that traders get better prices on v3, and LPs are (on average) getting better income from v3.
Using the flipside v3 calculator it’s possible to identify liquidity bounds that will produce returns higher than the 76$ average (but need more active management to stay in range).
Historical Uniswap v2 liquidity
While the majority of liquidity and trade volume is on v3, the v2 pool has run for the entire product life and is easier to analyse.
This shows the number of v2 LP tokens increasing until early May when it declined rapidly (when the v3 pool was launched), since late May there has been little movement in the number of LP tokens (although the number of ETH2-FLI in the pool will have increased as the price relative to ETH dropped).
Do we need to provide liquidity mining for ETH2-FLI?
The market is currently producing liquidity pools which allow ~30 ETH (~$55,000) trades at 1% price impact. and ~75 ETH trades at 2%.
While I’ve not done a detailed review of trades on Etherscan, it’s clear that there are a number of swaps happening in this range (e.g. 50 ETH on v2 and v3 via paraswap)
However, given that LP’s are currently enjoying rewards of ~50%, and we already have $11 M of liquidity, I would expect any campaign designed to result in a significant increase in Liquidity would be expensive in terms of INDEX tokens (+10$ M of v2 liquidity @ 50% APY for 30 days could be $410 K ~ 24,000 INDEX).
As such, I do not see Liquidity mining ETH2-FLI (on L1) as being the best use of the coops INDEX resources at this time.
However, I’m happy to hear others opinions (or read a review of the ETH2-FLI trade sizes…).