- Liquidity Mining (LM) program is still seen as the best way to bootstrap new ecosystem and new applications. However, very few people have used empirical studied / data-driven research to assess the true impact of LM.
- We studied the Uniswap 2020 LM program and found that the LM program did not improve significantly the liquidity nor the trading volume of major AMM pools including USDT-WETH, USDC-WETH, DAI-WETH and WBTC-WETH
- The LM program had a similar retention rate than airdrop with a 82% of LP churn after the end of the LM program.
- Our research is consistent with previous research including OP Uniswap such as analysis provided by SpringZhang (Sixdegree), 1choiku and Zelos.
- We use a diff-in-diff model to assess liquidity mining impact on Uniswap pools and found that liquidity does improve after the LM strategy, but the trading volume did not increase and even decrease slightly.
- This suggests that increased liquidity does not necessarily promote a rise in volume.
- If we consider LM as a form of customer acquisition for AMM, we found that the CAC of Uniswap was a staggering $7k+ per LP.
- This is one of the first time we believe one research the retention and impact of LM including CAC calculation.
- A subsequent article will delve into a more detailed analysis from the LTV perspective, such as how much liquidity is contributed by the 17% of retained users.
- We recommend protocols not do to one major airdrop and instead to have many microairdrops using data-driven strategy to build a strong holder base
- Sixdegree can help you build such strategy with Rabbithole infrastructure. Read about our case study with ParaSwap using RabbitHole and onchain quests.
- Contact us as [email protected] and Follow us on Twitter
3. Liquidity Mining Analysis
From September 18, 2020, 12:00 am UTC until November 17, 2020, 12:00 am UTC, Uniswap initiated liquidity mining rewards in four pools. We are analyzing the amount of ETH in these four pools during and around the liquidity mining period, as well as the trading volume. By evaluating these metrics, we aim to assess the impact of the liquidity mining campaign on Uniswap.
Since it's challenging to identify a rigorously comparable control group, conclusions are primarily drawn by comparing data before and after the liquidity mining event. There are potential inaccuracies in this approach, mainly because the control and experiment groups exist in different time frames, introducing some additional influencing factors.
Note: in the Liquidity Mining Analysis section, we only chose Uniswap. The reason is that Uniswap is easier to analyze because they have clear start and end dates for their liquidity mining. For most other DEXs, their liquidity mining is ongoing, and we haven't found a particularly suitable protocol to analyze yet.
3.2 Liquidity Performance
During the liquidity mining period, there was a notable increase in the liquidity of the four pools. This indicates that liquidity mining has a significant positive effect on the growth of liquidity in these pools.
- During the liquidity mining period, the liquidity (total ETH amount) of the four pools saw a significant increase, from 217,096,003 to 1,027,618,752, which is an increase of 3.7 times.
- After the liquidity mining event ended, the liquidity (total ETH amount) in the four pools returned to pre-event levels, or even slightly increased, from 217,096,003 to 256,462,119, marking an increase of 18%.
- Liquidity mining can bring about astonishing growth in liquidity in the short term. However, once the liquidity mining ends, it quickly reverts to a normal level or slightly above it. The short-term effects are significant, but the long-term outcomes are less than idea.
3.3 Volume Performance
During the liquidity mining period, the volume of the four pools not only didn't increase, but somewhat declined. Considering that volume is one of the most crucial indicators for the growth of a DEX, this suggests that increased liquidity does not necessarily promote a rise in volume.
- During the liquidity mining period, the volume of the four pools saw a decrease, from 143093152 to 123489942, which is a decrease of 13.7%.
- After the liquidity mining event ended, the liquidity (total ETH amount) in the four pools returned to pre-event levels, or even slightly increased, from 143093152 to 143603422, marking an increase of 0.4%.
3.4 Retention Analysis
Among the addresses that provided liquidity to the four rewarded pools on Uniswap during the liquidity mining period, those that are still active as liquidity providers on Uniswap are categorized as
retained LP addresses. In contrast, addresses that no longer contribute liquidity are labeled as
lost LP addresses.
- We found that out of the 25,046 LP addresses attracted by liquidity mining, only 17% of those addresses are still providing liquidity.
- Liquidity mining provided a total of 5,000,000 UNI as rewards. Given the current price of $6.17 per UNI, the total value of these rewards is approximately $30.85 million. If we consider these token rewards as a cost, and the 4,363 LPs that still provide liquidity as the long-term retained users, the Customer Acquisition Cost (CAC) is a staggering $7,077 per LP.
- This article primarily discusses the long-term benefits airdrops and liquidity mining bring to the protocol from the user's perspective. A subsequent article will delve into a more detailed analysis from the LTV perspective, such as how much liquidity is contributed by the 17% of retained users.
- While both liquidity mining and airdrops are strategies for user growth in protocols, they emphasize different aspects. Specifically, for DEXs, the ultimate goal of liquidity mining is to enhance the liquidity of pools, while the objective of airdrops is to encourage users to use the product as much as possible.
- If we eventually unify both approaches from the perspective of retaining users (addresses), we can attempt to compare them. The granularity of an airdrop strategy can impact the final user retention rate. Pioneers of airdrop events had somewhat crude designs for their airdrop schemes.Emulating these pioneers, subsequent protocols optimized their airdrop strategies, resulting in higher retention rates and a lower CAC.
- In comparison to meticulously designed airdrop strategies, early designs for liquidity mining were rudimentary. When we compare its CAC with that of airdrops, it tends to be on the higher side.
- Overall, the acquisition cost for Crypto Protocols, ranging from $1000 to $10000, is significantly higher than that of traditional financial institutions, which is between $50 and $1500. This is understandable given that the market is still primarily focused on early adopters, resulting in a smaller TAM.
- For the crypto industry to achieve long-term sustainability, continuous expansion of its user base is essential. One of the pressing challenges is the soaring user acquisition cost. On one side, advancements in industry infrastructure and regulatory compliance will make crypto more user-friendly to the general populace. ,Protocols can also consider adopting the data-driven, refined user growth strategies that have been successfully employed by Web2 companies.
- Sixdegree Lab is exploring a data-driven approach to refined growth and operations for Web3 products. We are thrilled to have Rabbithole as our partner and to take the first step based on their new feature, Rabbithole Quest Terminal.
- Sixdegree is a crypto-native onchain research firm that specializes in incentive optimization for protocols to enhance user growth
- We have worked with 25+ protocols including Lens, Gnosis, ParaSwap among others
- We are also working on solving onchain attribution problem
- We are Ethereum Foundation grantee for our research on account abstraction
- We have been selected by Nansen as research partner
- Contact us if you want to talk about onchain data, onchain growth among others at [email protected]
- Follow us on Twitter