I’m afraid you are not using the correct metric to illustrate the liquidity drain, or at least you don’t show the whole picture.
First of all, overall the liquidity is not being drained, Uniswap got to its liquidity all-time highs, and its liquidity increased around 2.5x due to the introduction of the liquidity mining program. It is currently top-1 DeFi project based on Total value locked metric.
An example of a metric that would be more suitable for your purposes would be the total amount of liquidity locked in top100 pairs excluding the top4.
Other questions I find reasonable to ask are:
What happened to overall liquidity in the DeFi space during the same time period? Especially when it comes to smaller pairs.
How profitable was it to provide liquidity for smaller pairs over this time period in terms of impermanent loss? What happened with the volume of the smaller pairs?
Sometimes the markets are in the correction phase, and naturally, the money migrates towards more stable assets.
If we take a look at how the prices changed for smaller tokens over the last month, it seems feasible that the liquidity would shrink due to it simply not being profitable anymore for people to be LPs due to the anticipation of impermanent loss.
- Has the smaller pair liquidity been drained during this time period from Uniswap to other swapping protocols?
Is Uniswap losing dominance? Does someone else provide substantially better conditions for being an LP for these pairs? If so, for how long will that be a thing?
My opinion on the topic at hand: nothing needs to be done, the system balances itself out perfectly as it is based on volume/liquidity.
Yes, we do create additional incentives for being an LP for the top 4 pairs, but it doesn’t mean that we hurt the profitability of other pairs’ liquidity mining. These incentives were not cut, they’re still the same as the ones that made Uniswap the dominant swapping protocol on Ethereum.