# Liquidity review - Jul 2021

**URL:** <https://gov.indexcoop.com/t/liquidity-review-jul-2021/2090>\
**Category:** Products\
**Created:** [26 July 2021 15:35 UTC](https://gov.indexcoop.com/t/liquidity-review-jul-2021/2090 "2021-07-26T15:35:18Z")\
**Posts on this page:** 1\
**Showing post:** 5

<div class="post-metadata">

**Author:** ![overanalyser](https://yyz1.discourse-cdn.com/flex027/user_avatar/gov.indexcoop.com/overanalyser/32/1319_2.png) [@overanalyser](https://gov.indexcoop.com/u/overanalyser)\
**Post date:** [27 July 2021 17:48 UTC](https://gov.indexcoop.com/t/liquidity-review-jul-2021/2090/5 "2021-07-27T17:48:12Z")

</div>

## DPI

Previous research in June is [here:](https://gov.indexcoop.com/t/liquidity-mining-strategy/1570/27)

In the discussions on MVI July LM campaign I commented:

> [@IIP-52 MVI Liquidity mining - July 2021](https://gov.indexcoop.com/t/iip-52-mvi-liquidity-mining-july-2021/1841/24):
>
> My (personal) understanding is that PWG mandate has evolved over time, at the moment I would say that it is two fold:
> 
> 1. Maintain sufficient liquidity to allow trades upto a size where exchange issue becomes cost effective (e.g. for MVI, trades upto 5 ETH have less than 1% price impact, above 5 ETH Exchange issuance is cheaper than market buy).
> 2. Maintain market dominating liquidity for the product.

**Exchange issuance**  
For DPI, Exchange issue uses ~1,800 k gas, so 50 gwei would be 0.09 ETH, ~$180 at $2,000 ETH.

Uniswap v2 swaps are ~ 100k gas, so ~$11 at 50 gwei and $2,000 ETH. So exchange issuance costs ~ $169 more than a simple swap.

* * *

_My understanding is that the available value in an arbitrage = 50% of the premium to NAV \* the trade size required to being the price back to NAV. So for DPI on v2:_

\*\* $18,000 at 1% premium ~ $90 MEV\*  
\*\* $36,000 at 1% premium ~ $180 MEV\*  
\*\* $18,000 at 2% premium ~ $180 MEV\*  
\*\* $36,000 at 2% premium ~ $360 MEV\*

_So exchange issue arbitrage should become profitable when there is \> 2% premium to NAV and the liquidity needs \> $18,000 to impact the price by 2%_

\*Likewise, a 1% premium to NAV, and liquidity deep enough to need \> $36,000 trade to give 1% price impact should allow profitable arbitrage.

* * *

**Onchain Liquidity**  
There are at least 5 on chain DEX liquidity pools that contain DPI and ETH:

- Uniswap v2
- Sushiswap
- Balancer v1 (With USDC and wBTC)
- Balancer v2 (with wBTC)
- Uniswap v3

**Figure 1** shows the AUM in each pool (Balancer v3 since 19Jul21)

 ![image](https://canada1.discourse-cdn.com/flex027/uploads/theindexdao/original/2X/a/a492416960096f55b5097aa24b35b83da4029573.png)

Current DPI:ETH trade sizes required to produce a 1% price impact:

| Uniswap v2 | Sushiswap | Balancer | V3 buy | V3 Sell |
| --- | --- | --- | --- | --- |
| $134,538 | $18,406 | $17,571 | $27,859 | $63,900 |

(note these are all collected by manually checking the trade size required to produce a 1% price impact using the different protocol trade UI’s the [Balancer UI](https://app.balancer.fi/#/trade) could be using either pool. However, I think it’s using v2 as it’s the larger pool).

**Figure 2** presents the on chain pool depth to produce a 1% price impact for each pool;

 ![image](https://canada1.discourse-cdn.com/flex027/uploads/theindexdao/original/2X/e/e6466344d2a5c19d498623abc2c772607cbb0e23.png)

Note, I don’t have balancer or uni v3 historical data due to the complexities of the UI / liquidity.

Combined the pools have been allowing\> $150,000 trades without impacting the price by 1%. This implies that if using a DEX aggregator, very large trades can be made without significant price impact.

**Trade volume:**  
Combined the 5 pools have averaged $2.4 m daily volume with significant variation:

 ![image](https://canada1.discourse-cdn.com/flex027/uploads/theindexdao/original/2X/2/21d51b3a8ba4fcc6040990e6ccc10bc773fd0fc0.png)

Univ 2 normally dominates the trade volume, however, there have been times when both v3 and Sushiswap have taken a large % (Figure 3):

 ![image](https://canada1.discourse-cdn.com/flex027/uploads/theindexdao/original/2X/6/6411dcb670177b8713fac647179f19aebf325fdd.png)

# 

**Capital efficiency**  
As expected, the v3 pool with the ability to concentrate liquidity can achieve larger trade volume to AUM ratios (Figure4)

 ![image](https://canada1.discourse-cdn.com/flex027/uploads/theindexdao/original/2X/2/2c5f9466ee87c6af806b2c877ed71446bb0186cd.png)

**Figure 5,** On average v3 is capturing 28% of the trade volume on v2 (with 5% of the AUM ~ 5.6 fold increase in capital efficiency):

 ![image](https://canada1.discourse-cdn.com/flex027/uploads/theindexdao/original/2X/1/1c7a1881d9695e97bc7c566faa06c02dce97cc1a.png)

**LP income**  
Comparison of the fees and staking rewards for the different pools:

| | Uniswap v2 | Sushiswap | Balancer v2 (3 tokens) | v3 |
| --- | --- | --- | --- | --- |
| Average volume to AUM | 4% | 6% | 2% | 24% |
| Free to LP | 0.30% | 0.25% | 0.50% | 0.30% |
| Annualised Fee | 4.7% | 5.2% | 3.4% | 26.2% |
| LM rewards (27jul21) | 9.7% | 11.3% | 18.5% | 0.0% |
| Average total fee | 14.4% | 16.5% | 21.9% | 26.2% |

* * *

Note, This analysis does not include pools available to some aggregators. Multiple Stable coin: DPI pools available for large trades. Figure 6 shows a large (800 dpi → 102 eth) trade with would allocate 20% of the total value to the Uniswap v2 pool:

 ![image](https://canada1.discourse-cdn.com/flex027/uploads/theindexdao/original/2X/b/b9cbe5f719d2b07a388f02c37c4e5817c6b28f76.png)

* * *

## Competitors

Comparison 22nd July 2021:

| Main chain | AUM ($ M) | Liquidity ($ M) | Volume ($m) |
| --- | --- | --- | --- |
| DPI | $115.90 | $42.64 | $2.56 |
| BDI | $11.60 | $16.80 | $0.16 |
| DeFI 5 | $8.20 | $4.40 | $0.61 |
| DEGEN | $6.00 | $1.60 | $0.18 |
| CC 10 | $3.20 | $1.80 | $0.08 |

Overall DPI:

- Dominates AUM at 10x our nearest competitor and 4x all other DeFi products.
- Uniswap v2 pool is double the nearest competitor and \>10x the others.
- Has 2.5 x the volume of the other for funds put together.

* * *

## Liquidity mining

[IIP-53](https://gov.indexcoop.com/t/iip-53-dpi-liquidity-mining-july-2021/1842) allocated 12,578 INDEX to a 30 day campaign between 13 July and 12th August. At $25 this is $315 k or $10,481 per day.

This is entirely focused on the Uni v2 pool which contains 14% of total units issued ( ~$17 m).

* * *

## What next for DPI:ETH liquidity?

There are a number of options:

1. Maintain similar incentives on v2 to ensure we dominate DBI in terms of liquidity
2. Reduce v2 LM and allow the pool to shrink and the other pools take more volume.
3. Stop v2 LM and use the v3 staking contract to encourage migration to v3 ([See discussion here](https://gov.indexcoop.com/t/a-few-thoughts-on-the-risks-around-uniswap-v3-lp-and-staking/2086))
4. Stop rewards for DPI:ETH entirely.

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_[View the full topic](https://gov.indexcoop.com/t/liquidity-review-jul-2021/2090)._