The transaction volume of Uniswap has not decreased after the suspension of mining. Is liquidity mining really necessary?

Original title: "Chain News Observation | Uniswap does not need to rely on liquidity mining? Losing the profit-seeking farmers, the annualized rate is not inferior to SushiSwap"

Original source: Chain News ABMedia

Uniswap has ended the first round of UNI liquidity mining, and liquidity providers in the four liquidity pools will no longer be able to receive UNI rewards. In recent governance proposals, there are plans for the next round of liquidity mining, but the Uniswap community is quite opposed to it, with nearly 90% of the votes not wanting to "launch" or "launch so soon" liquidity mining.

Does Uniswap really need liquidity mining? Observing the annualized rewards currently available to liquidity providers of Uniswap and SushiSwap, we find that Uniswap without liquidity mining does not seem to be bad.

Uniswap: Loss of liquidity, no sharp drop in trading volume

According to Chain News, after Uniswap stopped liquidity mining, its liquidity continued to decrease, but its trading volume did not drop significantly. On the other hand, the liquidity of its competitor SushiSwap increased significantly, almost returning to the level of September when it sucked blood from Uniswap. Although its trading volume has grown, it is still less than one-third of Uniswap.

When observing the DeFi locked asset rankings, it was found that SushiSwap was ranked sixth, while Uniswap had left the top spot and became fourth:

Uniswap community: No liquidity mining, no problem

Community member govro pointed out that UNI mining rewards actually have two negative effects:

First, compared with the past data of the four reward pools, with the support of UNI rewards, the total liquidity of the four pools is already much higher than the trading volume, which makes the income of liquidity providers (LP) (UNI + 0.3% handling fee) lower than the income earned solely by handling fees in the past.

Second, the issuance of mining rewards also dilutes UNI holders (non-LPs). The only benefit of liquidity mining is that the total locked value of Uniswap has increased, but the trading volume has not increased. The trading volume is the data that can represent the actual economic value of Uniswap.

For liquidity providers, what they expect is that active trading will bring considerable transaction fees, and the additional rewards of liquidity mining are only auxiliary profits. According to the opinions of Uniswap community member govro, we counted the "trading volume/liquidity ratio" before and after Uniswap stopped liquidity mining. The higher the ratio, the more transaction fees the liquidity provider (LP) can get overall.

From the results, after Uniswap lost liquidity, the impact on trading volume was not significant, so the ratio increased significantly. Without profit-seeking farmers to share the liquidity benefits, liquidity providers were able to get more transaction fees. On the other hand, Sushiswap, with a significant increase in liquidity, did not bring much help to the ratio in terms of trading volume, and even slightly reduced the benefits of liquidity providers.

Comparison of profitability of four liquidity pools

To further estimate and verify, Chain News compared the four UNI mining liquidity pools (WBTC-ETH, ETH-USDT, DAI-ETH, USDC-ETH) to see how much difference there was in profits compared to SushiSwap after there were no mining rewards.

Taking 1,000 USD as a unit, how much profit can be obtained in Uniswap and Sushiswap respectively based on the current data (11/19 13:00): (Uniswap only has transaction fee sharing, while SushiSwap has transaction fee + SUSHI reward)

From the above table, we can see that as a liquidity provider, participating in the ETH-USDT and USDC-ETH pools in Uniswap without liquidity mining still makes more profit than SushiSwap with liquidity mining. Therefore, it can be verified that under the current conditions (liquidity, trading volume and governance token price), Uniswap still has certain advantages even without liquidity mining.

In addition, it is important to note that the income from SushiSwap's SUSHI mining must be locked up for half a year according to the current system, depending on the price fluctuations; and the liquidity pool transaction fee income of 0.3% will be split into 0.25% for liquidity providers, and the other 0.05% will need to be obtained through additional staking of SUSHI. Therefore, the actual income will vary depending on user behavior.