Optimism LM phrase 2 analysis

Introduction 

Indicators

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, 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 Phrase 1 instrument by analyzing the impact of the LM scheme on the five trading pools and the four managers. We then close with suggestions for a better allocation mechanism.

 Methodology 

Date source

We use tick data and 1 minute re-sample for analysis. The py script for data download and cleaning can be viewed at A. Detailed processing guidelines can be found in B. The tick data download addresses are as follow:

pool address

For the four liquidity managers, we filter the one-minute resample data using the following contract addresses. In the calculation, we assume that the four managers share the Op incentives equally, each with a total of 25 K OP. The managers then divide the incentives equally among each of their own trading pools.

fund address

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. Denominated according to 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 start of 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 pool to the liquidity manager. wstETH-ETH is a newly opened trading pool and LM has apparently attracted a lot of LPs for the pool in a short period of time.

Swap behavior observations

By valuing each transaction in terms of base token, we plotted the volume and count of SWAP transactions over a 24-hour period. From a SWAP perspective, all trading pools other than the USDC-DAI pool have seen an increase in activity. The wstETH-ETH became very active due to LM because of the large number of users acquiring both tokens through the pool in order 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. For the sake of clarity of the plot, we ignore the data that the wstETH-ETH pool has four large slippage points in the early days.

We also measured the relationship between trading volume and slippage over time and plotted scatter plots.

Trading slippage for all pools is significantly lower in both the time dimension and the volume dimension. On February 2 there was a liquidity reduction in both OP-USDC pools, 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, which is the reason why its slippage reduction is not as willing as other pools. The reduction 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 .

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 amount of incentives. This results in different OP returns for the same amount of assets with different liquidity managers 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 and significantly reduced 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 pool. 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 a large number of users during the incentive campaign, and liquidity in each fund increased substantially after January 19th. Overall the program has contributed to the positive development of the overall Uniswap ecosystem.

For 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 in which both pools are competing for liquidity. We recommend the 0.3 commission pool, which has more liquidity managers participating and the incentive performs better on slippage.
• With the same idea as in Phrase1, 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 which liquidity provider they choose. Also this prevents speculators from shifting between managers which could affect the stability of liquidity in the pool.
• Reconsider the wstETH-ETH trading pool. Although LM has had a significant positive impact on this pool, far fewer users participate in it than in other pools. The pool also has a small number of SWAPs, which means that it is not efficient 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. No representation or warranty is made herein regarding the information’s fairness, accuracy, reasonableness, or completeness.

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