Stop the Liquidity Drain

Uniswap’s approach to liquidity mining is shifting liquidity in ways that will increase price slippage on important pairs and hurt Uniswap’s differentiation in the market:

  • The coins included in liquidity mining have gained an average of 268% liquidity.
  • Stable coin liquidity isn’t a market problem but it is allocated 3/4ths of current liquidity mining rewards.
  • The top coins not included in liquidity mining have lost an average of -31% liquidity.

Let’s debate approaches to solving this problem here. This is the data as of this morning (9/18/20):

Coins included in liquidity mining…
Coin (Change in Liquidity %)

ETH (+74%)
USDT (+31%)
USDC (+49%)
WBTC(+851%)
DAI (+337%)

Top Coins not included in liquidity mining
Coin (Change in Liquidity %) - Current Liquidity

sUSD: (-46%) - $10M
AMPL (-3.6%) - $10.6M
YFI (-9.5%) - $8.6M vs
LINK (-.76%) - $4.5M
LEND (-20%) - $3.3M
UMA (-58%) - $1.2M
COMP (-70%) - $1.6M
SNX (-46%) - $3.2M

11 Likes

I asked myself this question too. Why provide massive liquidity to stablecoins? Does liquidity not provide stability therefore making it almost pointless? Why not provide liquidity to uniswap’s own pair, UNI/ETH?

3 Likes

It is mind boggling - the focus on stable coins and bitcoin turns Uniswap into a narrowly focused competitor of Curve.fi.

:slight_smile:

The lack of a UNI pool reward needs to be addressed as well: Starting earning UNI on an UNI-ETH Pool ASAP!

2 Likes

I think it’s important for Uniswap tp give more incentive in supporting UNI pairs to support the stability of UNI more.

1 Like

Agree - do that first!

1 Like

This is a poor take on the state of things. You should do more research: how much volume is on those pairs through uniswap vs through centralized exchanges? Uniswap generates revenue through fees, so how exactly is having high volume liquidity pairs killing uniswap?

Having tokenized bitcoin enables trading wrt sats on Ethereum. Do you not see the value in that?

Did you read the uni announcement where they stated why they’re listing only these 4 pairs for the first 30 days?

Will you be celebrating when UNI-ETH gets a farming pool and whales use that to compound their UNI accumulation and dump your free PS5 into a free Casio watch?

You like to write, but should read instead. It’s a little early for the community to cannibalize itself.

3 Likes

The shift continues…

Uniswap liquidity is up 57% over the last 24h while Volume is down -13%.

61.8% of liquidity is now concentrated in the 4 UNI rewards pools.

1 Like

Everyone interested in this issue should review the work that the Balancer community has done for their liquidity incentive program. They whitelist tokens for inclusion in the program, and then assign them specific cap factors based on their relative value to the ecosystem. They’re doing a great job of broadening the program while filtering out abuse/gaming.

1 Like

Thank you for the reference. Here is a link to the original document that fed the governance discussion on Balancer: https://forum.balancer.finance/t/proposing-the-token-whitelist-for-bal-distribution/55

Their key tenet is ‘To Distribute as Many well-intentioned liquidity providers as possible’. This is in stark contrast to the approach taken by Uniswap as Uniswap only distributes to the four largest liquidity pools.

2 Likes

I’m just throwing out an idea here but say we provide incentives to any pool that includes an approved asset: WETH, USDC, DAI, USDT.

Next you could scale the amount of UNI given to each pool based on how many transactions that pool facilitates, to prevent a whale from just creating a pool with ETH and some shitcoin they created and sucking away all the UNI. As long as the amount of UNI sent to the LP is less than the transaction fees you wouldn’t have to worry about exploitation. Considering the cost of gas currently, I think it could work.

Good idea - the balancer link above has a lot of guidance on how to keep out shitcoins.

64.6% ($1.331B out of $2.06B) of liquidity is in the four UNI eligible pools now. (9/19/20)

61.8% of liquidity is now concentrated in the 4 UNI rewards pools. (9/18/20)

1 Like

69.7% ($1.387B out of $1.99B) of liquidity is in the four UNI eligible pools now. Trading volume continues to drop (9/23/20)

64.6% ($1.331B out of $2.06B) of liquidity is in the four UNI eligible pools now. (9/19/20)

61.8% of liquidity is now concentrated in the 4 UNI rewards pools. (9/18/20)

Can you specify what important pairs are?

The general incentive of all liquidity providing here is: Lock in Collateral, Earn Fees.
Thus big coins (big=volumes on multi exchanges/markets are high) are preferred, as there is more demand for exchange. See the lately boom of LInk, or other coins. If the demand is high, the pool liquidity rises.

Stable coin liquidity isn’t a market problem:
Uniswap doesnt solve a new problem. It solves exchange in a new way. By an fixed algorithm.
It depends heavily on arbitrage to balance pools. Therefore it is tightly connected to traders and other platforms. In a certain way unbalanced pools attract more traders/usage.

Perhaps we can set up a system that retroactively rewards UNI to liquidity pairs in proportion to total volume.

What do you folks think?

Volume is easily manipulated. Especially if small/unknown ERC-20 tokens are involved. Not a good idea.

73.2% ($1.684B out of $2.3B) of liquidity is in the four UNI eligible pools now. Daily trading volume down another -14%. This is a huge waste!

69.7% ($1.387B out of $1.99B) of liquidity is in the four UNI eligible pools now. Trading volume continues to drop (9/23/20)

64.6% ($1.331B out of $2.06B) of liquidity is in the four UNI eligible pools now. (9/19/20)

61.8% of liquidity is now concentrated in the 4 UNI rewards pools. (9/18/20)

I can only agree.

This is the kind of proposal we see everywhere and which is guided only by “short-term greed”.

Everybody should have a long term vision of “UNI”: more volumes therefore more fees therefore an increase in the value of “UNI”.
Not some artifcial tricks like UNI pairs, time locked UNI or I don’t know what.

1 Like

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:

  1. What happened to overall liquidity in the DeFi space during the same time period? Especially when it comes to smaller pairs.

  2. 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.

  1. 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?

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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.