Before Uniswap V3 came out and the crypto crash happened in May 2021, providing liquidity in Uniswap V2 was at its peak. Four months after its launch in May 2020, up to 11,765 liquidity providers were interested in adding liquidity to the pool. If zooming in the date range from Nov 2021 up to now, users no longer add liquidity to the pool, on 21 May 2022, only 305 LPs added liquidity and 183 of them decided to remove liquidity (Fig. 34). Apart from the external factors, users are less active in Uniswap V2.
Fig. 34. Uniswap V2 LPs' activities
In general, if only one swap is executed on V2, there is no problem with gas fee. If more than two swaps are implemented at the same time, the amount of gas used differs considerably. EIP-1559 was deployed on Ethereum in July last year for the purpose of reforming its fee market system, the current fee of transactions of Uniswap V2 on Ethereum is in the range from 160k to 240k gas used for processing the two-swap transaction and from 200k to 250k gas used for more-swap transactions. However, on a few occasions, the amount of gas has skyrocketed to more than 410k gas to process only two-swap transactions (Fig. 35).
Fig. 35. Gas Distribution time series data on Uniswap V2 from Apr 29th to May 29th 2022
In terms of the V2 market, the aggregate token pairs of V2 up to 73,975 pools as of May 9, 2022. Assume that each pool built is a new market, Uniswap V2 market goes through five stages of up and down (Fig. 36). The event which was triggered at the highest point was on 24 Oct, 2020 right after Uniswap announced their UNI token and gave airdrops to the community. More than 360 new pools were created on that day. The downtrend cycle had lasted until eight months later when the second highest point on 6 Jun 2021 gained 329 new pools.
Fig. 36. Number of markets supported in Uniswap V2
In the current cycle, the total number of pools established bottomed out on 12 May 2022 with only 11 new pools and gradually increased again in the following days. Although the downturn occurs in the short term, V2 no longer peaks as before. Since Q1 2022, the number of new pools fluctuates in the range from 11 to 210 pools.
Tab. 1. Uniswap V2 Top 3 markets in the last 90 days
According to blockchain data of Uniswap V2 from Dune Analytics, I discovered that the pair USDC/WETH has the highest trading volume in the last 90 days with $2.37 billion followed by the WETH/USDT pair with $1.49 billion (Table. 1). As already mentioned in the conceptual model, USDC and WETH have the least amount of risk and volatility, this pair can be considered as a safe investment option. In the next part of analysis, I take this pair as an illustration for token price and relationship in Uniswap V2 that token A is the stablecoin USDC and token B is the wrapped version of Ether WETH. Uniswap has four main trading pairs which are eligible to contribute to mine the native token UNI. They consist of USDC/ETH, ETH/USDT, ETH/DAI and ETH/WBTC. Because Ethereum blockchain requires an ERC-20 compatible token, all LPs utilized WETH rather than ETH. Though if ETH is shown in the analytics websites, the actual pool will be WETH.
Fig. 37. Trade volume of STABLE/WETH pairs by day of week in Uniswap V2
The main trading pairs include ETH and three pair of them are the pair of ETH and stablecoins. My data of trading volume of these three main pairs in the last 7 days of a week (from monday to sunday) showed that in Uniswap V2, the trade volume of USDC/WETH and USDT/WETH are almost popular. USDC/WETH was always the top one with $2,786B transacted on Wednesday, simultaneously, USDT/WETH pair achieved $2,582B, the gap of trading volume between these token pairs was pretty close.
2.2 Example of USDC/WETH pair
If comparing the pool value of USDC/WETH between Uniswap and Sushiswap - the second largest DEX deployed on BSC, Uniswap’s pool value is 17 times greater than that of Sushiswap at the end of 2020 (Fig. 38). But from the end of Q1, 2021, Sushiswap has outperformed Uniswap in terms of pool value. One year later, in Q1 2022, Uniswap was re-equal with the opponent and had a higher pool value in Q2 2022.
Fig. 38. Pool value of Uniswap versus Sushiswap
The liquidity problems of Uniswap V2 plus high gas fee on Ethereum is when other new DEX exploit the loopholes to attract users. Sushiswap applies the same constant product model but is deployed on Binance Smart Chain (BSC) which has gas fees nearly 20 times lower than Ethereum. With the version 3 in Uniswap, the liquidity providers will concentrate their tokens into specified value ranges, according to Uniswap's "concentrated liquidity" idea, meanwhile, SushiSwap does not have this feature and has stated that it has no intentions to add this to its platform.
In Q4 2021 and Q1 2022, liquidity of the pair USDC/WETH decreased significantly (Fig. 39). Liquidity of this pair hit the landmark of more than 318 million on 11 Nov 2021 and quickly fell back into the zone of under 200 million at the end of Q1 2022.
Fig. 39. Liquidity in USDC/WETH on Uniswap V2
Fig. 40. Price of token A and token B in Uniswap V2
Due to the nature of stablecoin, the price of USDC is consistent, slightly fluctuates in the range from $0.98 to $1.01 and usually remains at $0.999 (Fig.40). Its stability is associated with the token of a larger price fluctuation. Despite the fact that the price of ETH is more predictable than that of any other coins, it is still subject to the rule of supply and demand that governs the whole crypto market. Currently, the price of USDC/WETH is 1.001/1761.585 (USD) on 27 May 2022. In case the price of token A remains stable at $1, the exchange rate of A/B is quite similar to the price of token B (Fig. 41).
Fig. 41. Exchange rate of token A and token B in Uniswap V2
Fig. 42. Reserve value of token A and token B in Uniswap V2
The total reserve value (USD) of USDC/WETH in Uniswap V2 is maintained at a 50:50 ratio theoretically or insignificant difference, except on 5 Mar 2022, the reserve ratio did not retain the exact ratio with 50:84 in the pool, implying that only $103.5 million of USDC was added to the pool while $174.34 million of WETH was incorporated into the pool (Fig.42).
Fig. 43. Number of reserves in the pool A/B of Uniswap V2
Since the price of token B (WETH) is based on its oracle price, in order to balance the reserve value with token A, the number of token B alters drastically. If the price of token B goes up, the amount required will decrease and vice versa. For instance, when the price of WETH exceeded the threshold of $4716.54 on 8 Nov 2021 (Fig. 40), only 18.66 thousand WETH were contributed to the pool (Fig. 43) for the purpose of retaining $88.01 million of WETH corresponding to $89.26 million of USDC in the pool (Fig. 42).
Figure 33, 35 and 36 have a close relationship, we can deduce from a simple calculation as follows:
On 27th May, 2022: Token A Token B
Token price (Fig. 40): 1.00188 1761.585
×
Amount of reserves (Fig.43): 75.56M 43.98K
Reserve value (Fig.42): $75.71M $77.47M
Pool ratio 50 51.15
Fig. 44. Liquidity providers' fees generated from the USDC/WETH pool
With the number of reserves contributed to USDC/WETH pool and 0.3% trading fee in Uniswap V2, the liquidity providers receive more than $100M aggregate fee at the end of May 2022 (Fig. 44), increasing from $66.36M in July last year.
The average annualized yield of the USDC/WETH pair over 30 days (MA APR) started increasing from 11.243% in mid July 2021, the ramp-up was completed by the end of Jan 2022 with 25.048%. It dropped to 9.35% just two months later and remained below 11% of yields within one month. By the end of May 2022, this yield also rebounded to 19%. Within eleven months, liquidity providers reap the yield of over 16.4 % (Fig. 45).
Fig. 45. The 30-days moving average of annualized yield and cumulative yield of USDC/WETH pair in Uniwap V2
Fig. 46. Impermanent loss of the USDC/WETH pool in Uniswap V2
Impermanent loss is a sophisticated phenomenon that it’s difficult to notice in day-to-day trading, but it can represent the gap between profits and losses. As demonstrated in the CPMM model, impermanent loss is inevitable in Uniswap V2. Figure 39 indicates the divergence loss on Uniswap V2 in the period of 30 days, 90 days, 180 days and the whole. In the short-term, the liquidity providers couldn’t see the loss in their portfolio as it is negligible. However, on 24 Jan 2022, WETH price suddenly dropped 47.96% compared with its price one month before. Traders decided to sell off WETH for USDC that resulted in a decrease in the number of USDC and an increase in the quantity of WETH in the pool. Although LPs got profits of a higher 312% fee than the day before, they also stood to lose 4.073% on their portfolio since the last 30 days as well as 90 days. In the long-term of 180 days, about 9.4% of investor's portfolios were lost as of 28 May 2022.
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