My Experience From Providing Liquidity For 50 Days On Uniswap In The ETH-UNI Pool | What can be learned?

in LeoFinance2 months ago (edited)

I have been one of the lucky ones that got UNI airdrop. It was probably the largest airdrop in the crypto history. In fact, I got airdropped on two ETH addresses 400 UNI each. I have done some trades on UNI and then decided to play the game of liquidity provider.

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https://info.uniswap.org/home

We will take a look at the end results from the 50 days period of providing liquidity. Most importantly what lessons can we learn from it?

Why the ETH-UNI pool?

If we take a look at the announcement post we will see this regarding the liquidity mining:

Liquidity Mining

An initial liquidity mining program will go live September 18 2020 12:00am UTC. The initial program will run until November 17 2020 12:00am UTC and target the following four pools on Uniswap v2:

  • ETH/USDT
  • ETH/USDC
  • ETH/DAI
  • ETH/WBTC

5,000,000 UNI will be allocated per pool to LPs proportional to liquidity, which roughly translates to 83,333 UNI per pool per day
These UNI are not subject to vesting or lock up.
After 30 days, governance will reach its vesting cliff and Uniswap governance will control all UNI vested to the Uniswap treasury. At this point, governance can vote to allocate UNI towards grants, strategic partnerships, governance initiatives, additional liquidity mining pools, and other programs.


As we can notice the ETH-UNI pool is not incentivized. Why not choose the other pools where you get UNI on top the fees? Well I was thinking that the competition will be huge in those pools and if I want to go for UNI why not just enter the native pool. Also, I look at the process as a learning experience, lets do it and see what happens.

The one thing I regret is not entering the ETH-UNI pool as early as possible. Uniswap was launched on September 16th and I entered the pool on September 23rd. The very first day the volume in the pool was huge, with not as big liquidity and the earrings from that day for liquidity providers were massive.

Period for providing liquidity September 23rd – October 11, 2020

Before we breakdown the results, I want to say there are nice tools for this, like https://liquidity.vision/, but here I want to go through the process manually so we can learn more.

We will be looking at the following thigs:

  • Initial pooled assets and their value at the time
  • Current assets and their current value in the pool
  • Initial assets and their value at current prices
  • Fees earned

Initial pooled assets and their value at the time

As already mentioned, I have entered the pool on September 23rd, 2020.
Here are the assets and their value when I entered the pool.

TokenTokens AmountPriceValue
ETH2.49341.62852
UNI216.463.94852
1704

For this transaction, I have paid 0.024 ETH.

The above basically shows the starting investment in the native currency and their value in USD. A clear starting point from where we can follow how things evolved.

Current assets and their current value

50 days later, November 11, 2020 lets see what do I have in the pool?

TokenTokens AmountPriceValue
ETH1.97459.80904
UNI300.103.01904
1807

A total value of 1807 USD. Fees included.

My initial investment of $1704 now is worth $1807. A total of $103 increase in value. If I extract the fees, that are around $11 at current prices, the total increase in investment would be $92.

Just to make it clear. These 92 dollars are not earned from providing liquidity. It’s just a change in the value of the assets pooled. Bellow we will take a closer look at the earrings from fees and liquidity providing.

If we make the comparison of the structure of these assets between the starting table and the end one, we can see that I now own more UNI and less ETH.

  • UNI, from 216 to 300 = +84 UNI
  • ETH, from 2.49 to 1.97 = -0.52 ETH

Overall, I now have 84 more UNI and 0.52 less ETH. This is mainly because the ETH price has went up from $341 to almost $460 in the period and the price of UNI has dropped from 3.94 to 3.00.

Overall even with these price movements I’m still in positive. Although this can change daily as the price fluctuates. If I done this analysis only a few days back, when the UNI price was around 2$, things would have been different.

What would of happen if instead of pooling I just hold the assets?

Initial assets and their value at current prices [HODL]

If I was just about to hodl the things would looked like this.

TokenTokens AmountPriceValue
ETH2.49459.801,147
UNI216.463.01652
1,798

A total of 1798 value of the assets in todays price. Almost the same as the 1807 that I now have from the assets in the pool. Same value, just a different structure of the tokens 😊.

In summary:

  • Initial investment in the pool $1704
  • Current value in the pool $1807
  • Initial assets and their current value (hodl scenario) $1798

This is basically showing that I would have the same value in dollar terms with and without the pooling. 50 days in the pool for nothing? Is this the case?

What I have earned actually?

To see what I have earned from providing liquidity we will need to look at the balances of tokens and not the dollar value.

From the information that Uniswap is providing me I can see that I have earned the following:

TokenTokens AmountPriceValue
ETH0.085459.8039
UNI12.993.0139
78

A total of 78 dollars earned from fees. If this were not there, the current value of my assets in the pool would have been 78 dollars less.

I have earned almost 13 UNI and 0.085 ETH. These tokens are also in the pool, so they are not fixed and can fluctuate.

If we calculated the 78 dollars earned within these 50 days, on a 1704 initial investment we will get around 33% APY. That is not bad at all.

If I subtract these 78 dollars from the 1807 that I know have in the pool the end result will be 1729. This is the value of the current assets without the fees. When compared with the hodl scenario of 1798, I can see that I’m at loss of -69$. This is what is known as Impermanent loss.

If one of the tokens you are holding is losing value you will get more of it, and less from the token gaining value. The value of your total assets will go down. What this tells us you better provide liquidity in pools where you think that both of the tokens will gain value in the future.

Final results from my experience: I have made a 78 dollars profit from providing liquidity in the ETH-UNI pool and a -69 dollars from impermanent loss.

This basically gives me a +9 dollars from pooling scenario than the hodl scenario.


What can be learned from the above?

There are two major things to be considered when pooling:

  1. The APY of the pool
  2. The expected value of the token

In the case above the APY of the pool is quite good. A 33% average for 50 days providing liquidity.

The second thing is what do you think how the token will perform in terms of price. I’m saying the token here in singular since the other token in this case is constant ETH.

Depending on the performance of the token you will have your impermanent loss. In this case UNI had a bull run at its launch and the token price dropped afterwards. Still my gains from the pooling manage to outperform the drop by a slight margin resulting in a very tiny gain from the pooling when compared to the hodl scenario.

Having in mind these price movements and fluctuations, some are seeing stablecoins as the best way to gain from pooling. When you have only stablecoins in the pool, the risk of impairment loss is eliminated.

What about the pool APY?

This is the other important factor to consider. When pooling you are balancing between the risk of impermanent loss and the APY of the pool. If the APY is high enough it might cover for some impermeant loss.

The highest APY (at least to my knowledge) are the incentivized pools. Uniswap is not the only swap DEX now. There is Balancer, Curve, Rune coming soon, and even the Binance CEX swap platform. A lot of these project are incentivizing pooling dropping tokens on some pools, the same as Uniswap is doing for the four pools above.

A lot of project are doing their individual incentive for pooling. Splinterlands and LeoFinance are example of this.
From my personal experience, apart from pooling in the ETH-UNI pool I have been pooling in the ETH-DEC pool as well with approximated same value of assets.

If we apply the analytics and the two factors from above for this pool we get the following. In terms of assets value and impairment loss, DEC is acting as a semi-stablecoin so the risk from impermeant loss is smaller although not nonexciting. In terms of APY the pool is incentivized with land plots. My one-month pooling has resulted in around 80% APY. Although you get plots so the APY is very much dependent on the price that you will be able to sell these plots for.


The overall lesson from the above will be provide liquidity in a pool where you think the token will perform good or stablecoins for maximum security and provide incentives in pools with high APY, usually some incentivized.

All the best
@dalz

Posted Using LeoFinance Beta

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Thanks for sharing this.
My experience with DeFiBox and EOS/BOX is not very good...Definitely, I prefer trading than be a liquidity provider.
Hope you can get back the invested ETH.

Well as you can see I'm basically at the same dollar value. Nothings is lost. I have done better in the Splinterlands pool :)

Also you can pool stablecoins only for minimum risk, the curve.fi has this option. For example usdt-usdc-dai.

Although at the end of the day I think trading is the best :) Although sometimes can be intense.

Posted Using LeoFinance Beta

Agree, it is intense but gives you plenty of satisfaction ;-)

Beautifully written article and clearly explaining the concept of impermanent loss!!

Posted Using LeoFinance Beta

Thanks!

I have 2 pools, the RFOX/ETH pool and the DEC/ETH which are also both incentivised. Now adding a 3rd for the LEO/ETH
The return on DEC trading fees is lousy though

Posted Using LeoFinance Beta

RFOX? First time hearing about this.
Can you share the pair link from uni here please.

DEC fees are secondary. The main thing are the plots.

Posted Using LeoFinance Beta

Rfox labs are the ones that created the KOGS on WAX, really popular NFT
redfoxlabs.io
have a read up, token already did a 10x for me but looks like another 10x is in the books

Posted Using LeoFinance Beta

Pair Name
RFOX-ETH
Pair Address
0x4214290310264a27b0ba8cff02b4c592d0234aa1
RFOX Address
0xa1d6df714f91debf4e0802a542e13067f31b8262
ETH Address
0xc02aaa39b223fe8d0a0e5c4f27ead9083c756cc2

Thank you for sharing this experience with us, @dalz.

Posted Using LeoFinance Beta

Yeah, I also tried some of the liquidity providing on Uni. Ended up spending more on fees than I got the profit but it was just a first try. The amount was probably way too low to earn something meaningful.

Thank you for sharing your experience!

Posted Using LeoFinance Beta

Yea you need a bit larger amount to put in to make up for the fees. Otherwise not worth it.

Posted Using LeoFinance Beta

I'm thinking of trying the BNB chain liquidity pools. Fees on BNB are much smaller than ETH.

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Thank you for taking the time to write this clear-cut explanation @dalz

Posted Using LeoFinance Beta

Thanks!

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If UNI price was 1.85USD, and ETH was about 395USD, what would the whole investment value? Thanks.

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Cant tell at first, but obviously lower :)

Posted Using LeoFinance Beta

This was a great analysis. It's no surprise people are flocking to Uniswap. 33% APY in a relatively very safe investment is a big deal. That is at least 3 times what I gain on HIVE.

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33% is great, but it doesn't mean it will stay this way going forward.
In the first week the APY was more than 50%, but then went down, on some days around 10%. At the moment is around 14%.

Posted Using LeoFinance Beta

Thank you for the extra details. I'm making 7.2% APR according to HiveStats and there is the additional 3.47% interest on my HP. LEO curation has been doing really well after the flattening the curve. Now HIVE looks like a very attractive platform with fun of curation and learning new things added to the mix.

Posted Using LeoFinance Beta

Thats a great detailed research on the effectiveness of your investment/pooling. Hmmmm, I take your note: best is to porivde liquidity when both Ethereum and the other token will gain in value. I suppose, its not so good to go into some liquidity pool of a new token since thet usually decrease in value in the beginning. Also, I guess its better to go for ling term liquidity in those tokens that are expected to do well over a longer period of time. This essentially reduces the target tokens to the bluechips, the top tokens in crypto universe. Step in when they are low, ie not now since we are in a bull market and likely we'll see some pull backs after the bulls used all their energy and needs a season or more to regain strength again.

Interesting to see what is happening now with LEO. Some larger purchases at Uniswap at the moment driving the price up. Wondering what will happen. Will it continue to rise without major pullbacks? Then it would be interesting to provide liquidity to the wLEO pool. But it may go the same as with many entries, after the initial hype, pullbacks happen. In the end investing in any form, stays kinda gambling like, at least for the short term.

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Wondering what will happen. Will it continue to rise without major pullbacks?

Wish I knew that to :)

Markets gp up and down, cant go just in one direction.
One thing that is for sure with wLEO is that it provides a large liquidity and you can buy and sell bigger amounts without changing the price much.
This gives a stability in the price.

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This gives a stability in the price.

That is at least something; With about 250k$ in the pool already, its for wLEO/LEO already a major achievement. I believe, the LEO team provided the first 50k$, which means others provide the 80%, all within a single day. Thats super!

BUT, this will not say anything how strong or weak LEO will be in the near to longer future. Though I'm optimistic for the short term and semi-optimistic for the longer term. Why semi-optimistic: Well, after being with Steem/HIVE for 4 years, I still have my doubts regarding sustainability of crypto rewarded blogging as we have it implemented. Maybe the Patreon model is the future model, ie tipping like instead of rewards from inflation.

From what we have seen, blogging can be a nice mechanism for token distribution. There needs to me more things on top of it.
Hive is more than blogging now, leo as well.
Still cant tell what the future hold :)

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There needs to me more things on top of it.

100% agree... blogging alone is not suffcient for the underlying chain to become a success.

Can anybody tell me how to take my wLeo/ETH out of the pool? Just in case ;)

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Thanks, I feel a bit more save now ;)

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