Instant Benefits — V3 DEX Pools Performance Analysis
Today we want to take a closer look at the newly deployed V3 liquidity pools and how they performed in their first month of operation relative to their V2 counterparts.
We will discuss what “utility” means in the context of a DEX pool, how that utility was impacted by the technology upgrade and what direct results it yielded.
On March 21, we announced the launch of V3 Pools on the Hydra DEX. The full article including a detailed presentation of the many new features can be read below:
Shortly after (on March 31), the liquidity mining campaigns were moved from V2 to V3 pools, in order to incentivize the migration of liquidity. The respective announcement article is linked below:
Since the migration, we now have a full month of data, which we can use to compare and assess the effectiveness of the new technology. With that, let’s dive directly into it!
How to Measure a DEX?
When we think about decentralized exchanges, currently the most talked about metric is “Total Valued Locked (TVL)”. This naturally makes sense, because the amount of liquidity inside a system has a direct impact on the utility and usefulness of it.
Especially with V2 technology, where the liquidity distribution inside the pools is pre-defined by a default formula, the only way to increase utility is to increase the TVL. Over the years, this thinking established itself across the industry and still persists today.
Before moving on, let’s first define the term “utility” used above. In the practical sense, the main utility of a DEX is its capability to support trades with as little cost and slippage as possible. Therefore we can simplify “utility” and swap it with “liquidity depth” (higher depth = bigger trades are possible).
For V2 pools:
2x TVL = 2x Liquidity Depth
With V3 technology, however, TVL is no longer the only game in town. We now also have the ability to structure and concentrate exisiting TVL around certain price ranges. This way it becomes possible to significantly increase the liquidity depth based on how the available liquidity is positioned.
For V3 pools:
2x TVL * 5x Concentration = 10x Liquidity Depth
In other words, we now have a quality component in addition to quantity.
Given that the quantitiy (TVL) within the DEX hasn’t changed much between V2 and V3, the following analysis will focus on the quality component.
Much Improved Liquidity Depth
Now that we know what to look at, let’s investigate two case-studies that are relevant to the Hydra ecosystem — the HYDRA/USDC and USDC/USDT pools.
The first one is the connecting backbone of the native HYDRA coin, while the latter serves the critical purpose of stablecoin-interoperability.
Case Study 1 — HYDRA/USDC within 2% Price Range
For most pools, the 2% price range is commonly used as a standard metric to measure liquidity depth. It essentially quantifies how much you can buy or sell until you move the price of an asset by 2%.
We know that based on their fixed formula, V2 pools offer a liquidity depth equal to 0.5% of their TVL within the 2% price range.
Currently the HYDRA/USDC pool has a TVL of roughly $163,000. Based on this, we can calculate that with the V2 pools, DEX users could buy or sell up to $815 worth of HYDRA within a 2% price range. How does this compare to the new V3 pools? Well, let’s see it in action.
With the same TVL of $163,000, users can now buy or sell up to $8,700 worth of HYDRA within a 2% price range (price impact of 1% = price range of 2% due to arithmetic averaging).
Essentially, by increasing the quality of the liquidity structure, we achieved $8,700 worth of liquidity compared to the previous $815! Remember that we did this with the very same TVL that was available before. Not a single additional $ was needed.
This translates to a 10.67x higher capital efficiency!
In other words, traders can now work with 10x bigger amounts at the same cost.
Case Study 2 — USDC/USDT within 1% Price Range
Because we are now looking into a stablecoin pair, we will be upping the game by looking at an even narrower price range (1%). After all, no one wants to swap stablecoins at a loss.
Let’s apply the same reasoning from above to this pool as well. The USDC/USDT pool has a total TVL of $195,000. Therefore we know that a V2 pool could support up to ~$500 worth of liquidity within a 1% price range.
Looking into the V3 pool in action, we get a staggering result:
Yes, you are seeing it right. There is indeed $90,800 worth of liquidity in the 1% price range (price impact of 0.5% = price range of 1% due to arithmetic averaging)!
Comparing this to the $500 of V2 pools, the impact becomes hard to overstate.
This translates to a 182x higher capital efficiency!
For comparison, the Hydra V2 DEX would have required an additional $35M worth of liquidity, just to arrive at the same result.
The explanation is simple. The stable nature of the assets makes it possible to narrow down the price range considerably. For traders, the difference is like day and night. With V2 pools, swapping stablecoins was virtually impossible, because no one wants to swap 5,000 USDT for 4,700 USDC.
In this sense, there is a benefit that goes beyond simple efficiency. It unlocks a completely new feature that wasn’t practically viable before.
On top of that, there is also a fee rate discount. Stablepools currently operate with a 0.05% fee setting compared to the 0.30% before. This removes the final hurdle of swapping stables on the Hydra DEX!
Impact on Trading Volumes
With all that, it is not surprising that volumes on the Hydra DEX have picked up with the transition. In this section we will look at the data for the first full month after the migration: April 1 — April 30.
First we need to identify the volume pattern on the Hydra DEX that was achieved with V2 technology. For this we will take the observation period between January 1 — March 31 (last 3 months of operation).
We will exclude the CHANGE token, because it didn’t complete the migration yet and also the ETH/WBTC pool because it wasn’t available on the V2 DEX.
The average monthly volume on the V2 DEX was $560,000 during the period. Now, let’s compare this with the $1,357,000 volume for the V3 DEX during its first month of operation. The difference is 2.42x fold.
Note that the increase is completely organic as there hasn’t been any trading competition or user acquisition campaigns.
Final Remarks
The analysis shows that the technology upgrade already benefits the ecosystem and serves as an important validation to the efforts made.
The results are especially important in the context of future scaling plans and the ability for the network to utilize resources efficiently while taking advantage of network effects. A critical capability for adoption and project onboarding.
With that, we will conclude today’s article and hope that you enjoyed the insights! Stay tuned for new developments and insights by joining the news channel through the link below.
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HYDRA is a proof-of-stake blockchain optimized for real-world businesses. It tackles some of the most profound and challenging issues with existing blockchain economies and introduces a truly shared economy with fair treatment to all network participants.
