Compilation of the original text: The Way of DeFi

Compilation of the original text: The Way of DeFi

The recent bear market has brought increased scrutiny to the token economics of various projects. The narrative has largely shifted from chasing reflexive mechanics that work wonders during bull markets to sustainable profits, which in turn allows projects to weather periods of waning retail interest. However, it is rare to see direct comparisons of projects based on profitability, and few resources are even dedicated to this purpose.

Therefore, this article conducts the following research comparing the main Ethereum and Solana DEXs (focusing on the latter) in terms of profitability. Profit will be defined as:

Profit = Revenue (protocol fee) - fee (liquidity mining)

In reality, projects may have expenses other than liquidity mining (e.g. team salaries, marketing, etc.), but these numbers are usually not released publicly, and finding protocol fees for each project and liquidity mining data is not easy; this Involves joining their respective Discord servers and asking questions on an ongoing basis. Also, not all protocols share profits with their token holders, some require you to lock up tokens to get your share. We therefore define profit in such a way as to bypass these differences and compare agreements on a normalized basis.

At what token price will the protocol break even (profit = 0)? This gives us a way to estimate the "fair value" of the token.

• Is the protocol making more money than it pays out (protocol fee > liquidity mining)? This helps us assess whether the protocol's current strategy is sustainable.

• At what token price will the protocol break even (profit = 0)? This gives us a way to estimate the "fair value" of the token.

• How much will token holders get if they receive a proportional share of the protocol's profits (APR on market capitalization profits)? This measures the desirability of holding tokens, assuming all income is distributed to holders.

• How much profit can the protocol generate using its TVL (TVL's APR Profit)? This gives us an idea of ​​how effectively the protocol is able to utilize its deposited assets.

Before discussing the items individually, let's look at the overall results:

The highlighted columns on the right provide answers to the above questions.

• Daily profit is simply revenue minus circulation.

• The breakeven token price is the price at which the daily profit equals 0, and the breakeven price change is the percentage change in the token price to reach that price. This is interesting, but not meant to be prescriptive; these numbers should not be interpreted as what the token "should" be worth. It is simply a way to quantify the difference between the revenue earned by the protocol and the value unlocked through liquidity mining (LM). (Note: it cannot be applied to projects without any LM.)

• The APR for market cap and TVL profits is calculated by treating the daily profit as revenue generated by market cap and TVL and converting it to APR.

Uniswap

Although not interesting from a data point of view, I feel compelled to include Uniswap as it generates the most volume of any DEX.

Uniswap has neither LM emissions nor protocol fees, so it has no profit or loss. However, it does have a "fee switch" that the governor can decide to turn on at any time.

Turning on fees will undoubtedly increase profits, but it will also cause a cycle of LP fee reduction → liquidity reduction → transaction volume reduction → LP fee reduction until a balance is reached.

SushiSwap

SushiSwap is a fork of Uniswap that has been expanded to provide various services.

SushiSwap appears to be one of the more sustainable protocols. I'm not very familiar with their ecosystem, so there doesn't seem to be a better way to explain this than their relatively low LM release.

Curve

Curve, the largest stablecoin DEX on Ethereum, has recently expanded to non-stablecoin pairs.

Among the protocols studied in this study, Curve has the largest release of LM, more than 10 times its revenue. Curve recently released their V2 pool, so it will be interesting to see if they can meaningfully increase Curve's earnings.

Serum

Serum is a central limit order book on Solana.

Serum also has a lot of LM releases relative to the revenue it generates. It has a fully diluted market cap, even larger than Uniswap, which is part of the reason it has so much leeway in providing incentives.

Saber

Saber is the largest stablecoin DEX on Solana.

While Saber generates a fair amount of transaction volume, its extremely low fees mean that the protocol generates very little revenue, mostly from its 0.5% withdrawal fee on its USDC-USDT pool. In any case, relative to the income it generates, its LM release is quite impressive.

Orca

Orca is the largest Uniswap v3-style DEX on Solana. Orca is the largest Uniswap v3-style DEX on Solana.

Orca currently only charges protocol fees for its fixed product pools, and like Uniswap, has not turned on protocol fees for its centralized liquidity pools. Turning them on increases profits, but also reduces volume, so it's hard to tell how much of an impact it will have.

Raydium

Raydium is a DEX on Solana that both has its own pool and publishes its liquidity on Serum's order book.

Raydium already incentivizes the majority of its capital pool with a steady stream of LM rewards, which currently far exceeds its revenue. As pooled liquidity has become more common on Solana, it has become increasingly difficult for Raydium to gain the volume share of the major pairs it once did.

Lifinity

Lifinity is a relatively new DEX on Solana with many unique features:

• No LM release

• The protocol owns most of the liquidity it provides (and thus gets 100% of the fee for that portion of liquidity)

• Centralizing liquidity around oracle prices, significantly reducing or even reversing IL (i.e. profiting from market making by buying low and selling high on average without any type of price prediction)

• Summarize

Summarize

All DEXs are useful infrastructure in some way. They enable market makers to provide liquidity and traders to gain access to this liquidity for a fee. However, the existence of LM releases often implies the recognition that traders have an advantage as the initiator of any transaction, and thus liquidity providers need additional compensation in addition to charging fees.

The necessity of LM release calls into question whether the protocol can capture more value than it releases. Internet protocols such as TCP/IP are also very useful, but fail to capture any of the value they create. Is this also the fate of most DEXs?

It also sheds light on why parameters like TVL, volume, and earnings are not as useful as how often people mention them. These figures can be artificially inflated by increasing LM release. At the end of the day, do these metrics matter if a protocol is not generating profits for its token holders?

Of course, profitability is not the most important thing when considering investing. How the protocol uses its profits also matters, and speculation plays a big role in whether a token appreciates in price. But there is no way to quantify this power, we only need to focus on the profits currently being generated. So this seems like a correct starting point for the analysis, especially compared to the parameters mentioned above.

I hope this type of data becomes more readily available and becomes a standard metric for comparing not only DEXs, but other types of protocols (lending, leveraged yield farms, etc.). I'm sure others can collect this data more efficiently than I can. Ideally, someone would create a dashboard that could monitor the protocol's profitability in real time.