DEFIMARKETAPPLICATION

Uniswap | A quick look at UNI annualized returns, not high but potentially steady

2020/9/18

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Report: Uniswap's first round of liquidity mining was launched at 8:00 a.m. on September 18th (Taiwan time) and is expected to end at 8:00 a.m. on November 17th. At this stage, it is being implemented for the following four pools:

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

Each pool will provide 5 million UNI tokens, equivalent to approximately 83,333.33 UNI tokens per day.

What liquidity providers need to pay attention to is summarized in the following three pieces of information:

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1. Estimated annual return and evaluation of returns
2. How to participate in liquidity mining
3. Impermanent loss

Estimated Annualized Returns and Return Assessment

Twitter user Benjamin Simon compiled a spreadsheet of UNI's annualized returns, with variables including "Total Value Locked (TVL) in the liquidity pool" and "UNI token price."

The algorithm for the annualized return rate in this table is: UNI token price * daily released tokens / total locked assets in the pool

For example, in the ETH-DAI liquidity pool, as of the deadline, the total is $174 million. Based on this formula, it is estimated that participating in liquidity mining for ETH-DAI, at the current UNI token price of $4, yields an annualized return of 69.52%.

Compared to other liquidity mining platforms, Uniswap may not be as outstanding, but due to its large existing user base, leading decentralized trading volume, and the shared 0.3% fee, some still have a positive outlook.

How to Participate in Liquidity Mining

[Warning: Liquidity mining carries high risks and expensive fees, should be evaluated cautiously]

Using the ETH-DAI liquidity pool as an example, after providing an equivalent value of ETH and DAI on the [Pool] page, you will receive the corresponding liquidity proof token UNI-V2 ETH-DAI.

After obtaining the liquidity proof tokens, select the invested liquidity pool on the [UNI] page. Upon entering the Deposit page, you can deposit the liquidity proof tokens, and the page will also display the amount of UNI tokens the user can receive weekly.

Impermanent Loss

In brief, it is a situation where assets are temporarily lost when providing liquidity.

It is important to understand the difference between "holding an asset" and "providing an asset in a liquidity pool."

Impermanent loss often occurs in typical liquidity pools, where liquidity providers (LP) must supply two assets in a fixed value ratio to the liquidity pool. The price relationship between one asset and another will fluctuate. For example, in Uniswap's DAI-ETH 50/50 liquidity pool (meaning LP needs to input equal value of DAI and ETH), if the price of ETH rises, the pool must rely on arbitrage to ensure that the pool's price is consistent with the market price, maintaining the correct price of the two assets in the pool.

However, due to arbitrage actions resulting from the appreciation of a particular asset, LPs will incur value losses. If an LP decides to withdraw their liquidity at this point, the temporary loss will become "permanent loss."

You can learn more about this in the article "DeFi Fraud Prevention | What is Impermanent Loss? Uniswap, Curve, Balancer."