Optimism Uniswap LM Phrase-2 Analysis
Introduction
On January 19, 2023, the three-week Optimism-Uniswap Protocol Liquidity Mining Program began. This LM offers a 100K OP bonus and is allocated to four liquidity managers: Arrakis, Gamma Strategies, xToken Terminal, and DeFiEdge. Five designated trading pools are.
- WETH-DAI 0.3%
- USDC-DAI 0.01%
- wstETH-ETH 0.05%
- OP-USDC 0.3%
- OP-USDC 0.05%
Users who provide liquidity to the designated trading pool through the liquidity manager are rewarded with OP. This paper continues the Phrase 1 instrument. We analyze the impact of the LM scheme on the five trading pools and the four managers by Demeter. We then close with suggestions for a better allocation mechanism.
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Methodology
Data Source
We use tick data, and a 1-minute resample for analysis. The py script for data download and cleaning can be viewed at https://github.com/zelos-alpha/research. Detailed processing guidelines can be found at https://medium.com/zelos-research/optimism-liquidity-mining-program-analysis-35fe7a105314. The tick data download addresses are as follows:
We filter the one-minute resample data using the following contract addresses for the four liquidity managers. The calculation assumes that the four managers share the Op incentives equally, each with 25 K OP. The managers then divide the incentives equally among each trading pool. We use Demeter to analyze each product of liquidity managers and reproduce their returns. For a detailed description, see Fund Report Part 2.
To show the impact that LM brings to the pool, we extend the data time range by two weeks and choose data from 1.4 to 2.9. Note that the wstETH-ETH trading pool only has data from 1.13 onwards.
Indicators
Rolling TVL represents the change in TVL of the trading pool over the last 24 hours. It is denominated according to the base’s token.
Realized slippage is the absolute value of the price change percentage after each SWAP.
Pools Result
Mint and burn behavior observations
We counted the events of Mint and Brun and plotted the image using the liquidity of the trading pool. The red line shows the cumulative volume of events in the last 24 hours for each time point. Liquidity increased for almost all trading pools after the LM. the short-term drop in USDC-DAI and WETH-DAI pools at the start of the LM may be due to users moving assets from the collection to the liquidity manager. wstETH-ETH is a newly opened trading pool, and LM has attracted many LPs for the pool quickly. The reduced liquidity of the OP-USDC 0.5 pool may be due to users moving to the pool with the same token pair and a 0.3% fee.
Swap behavior observations
We plotted the volume and count of SWAP transactions over 24 hours by valuing each transaction in terms of the base token. From a SWAP perspective, all trading pools other than the USDC-DAI pool have increased activity. The wstETH-ETH became very active due to LM because of the large number of users acquiring both tokens through the pool to provide liquidity to gain incentives. The SWAP dynamics of the two different fee pools OP-USDC are very similar.
Slippage and TVL variation
For each hour, we calculate the weighted average of the slippage by swap volume. By averaging over 24 hours, we plot a relatively smooth curve. To clarify the plot, we ignore the data that the wstETH-ETH pool has four significant slippage points in the early days.
We also plotted the relationship between trading volume and slippage over time to scatter plots.
Trading slippage for all pools is significantly lower in time and volume dimensions. On February 2, there was a liquidity reduction in both OP-USDC collections, so the scatter plot of the 0.05 fee pool shows a pattern of two curves. Only one liquidity manager makes a market on the 0.05 commission trading pool, so its slippage reduction is less willing than other pools. The decrease in slippage in the WETH-DAI trading pool is significant, and it is clear that LM provides better market depth to the trading pool.
Optimism Bridged
As you can see from the chart, the tokens in question flowed significantly into Optimism after the LM started.
Funds Result
Uniswap divides the 100K OP incentive equally among the four liquidity managers, and we assume that each liquidity manager divides the OP equally among their respective trading pools. Using Demeter, we replicate the liquidity and return performance of each fund. In the net value picture, we did not include the gain from the OP incentive. The wstETH-ETH trading pool has too little data and lacks statistical value; we, therefore, did not analyze this pool.
- Gamma provides liquidity in the WETH-DAI trading pool at approximately 10^{20}.
As with LM Phrase 1, the OP allocation mechanism still suffers from two problems, return distortion, and fund underperformance.
Return distortion: different funds provide different liquidity in the pool, but each fund is allocated the same incentive amount. This results in separate OP returns for the same amount of assets with varying managers of liquidity chosen.
Fund underperformance: Most funds in the pool benefit less than simply holding one asset. The average allocation of OP does not serve as an incentive for liquidity managers to optimize their strategies.
Closing Thoughts
LM attracted significant liquidity to the five trading pools, significantly reducing the pool’s trading slippage. This incentive program has contributed to the stable growth of the trading pools, which is particularly evident in the wstETH-ETH-0.05 collection. Also, judging from the cross-chain bridge, the tokens associated with the trading pool increased significantly at the beginning of the LM. The liquidity provider also attracted many users during the incentive campaign, and liquidity in each fund increased substantially after January 19. Overall the program has contributed to the positive development of the overall Uniswap ecosystem.
For the future Optimism-Uniswap Liquidity Mining Program, we have some suggestions.
- OP-USDC selects only one fee-based trading pool to provide incentives to avoid a situation where both pools compete for liquidity. We recommend the 0.3 commission pool, with more liquidity managers participating, and the incentive performs better on slippage.
- With the same idea as in Phrase 1, we propose to allocate OPs according to the volume size of the liquidity manager rather than equally. This allows users to obtain approximate incentives regardless of their chosen liquidity provider. Also, this prevents speculators from shifting between managers, which could affect the liquidity stability in the pool.
- Reconsider the wstETH-ETH trading pool. Although LM has significantly impacted this pool, far fewer users participate than in other pools. The pool also has a small number of SWAPs, which means it is inefficient for LPs to receive fee revenue. Choosing a hotter trading pool would enable more users to profit.
Disclaimer
This is a working paper representing research in progress. The report is the production of a professional study, and its contents are intended to be informational only. This article is not and should not be considered as providing investment advice. There is no representation or warranty regarding the information’s fairness, accuracy, reasonableness, or completeness.
