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Uniswap: Solid Fundamentals and Its Road to the Global Liquidity Layer

TLDR

  • Uniswap currently dominates 60% DEX volume with no more than 40% TVL. The pool with highest TVL on Uniswap has 2x-5x liquidity utilization of Curve 3pool.

  • Uniswap has a clear advantage across the EVM ecosystem, and always attracts the most traffic once it is deployed on a new EVM chain.

  • After dividing the spot market into four categories, we find that

    • For traders, Uniswap has the best liquidity in majors (deeper than leading CEXs), broad and timely coverage of long-tail assets, and is taking over Curve in stablecoin trading.

    • For LPs, Uniswap offers far better yields than most other DeFi protocols, the only exception being stablecoins as the best yield comes from lending protocols.

  • The main driver of Uniswap's revenue is the 0.05% fee pools (BTC and ETH trading). This tier contributes 61% of the volume and 44% of the revenue. 0.01% tier or stablecoin trading, however, only makes up 1% of total revenue.

  • Considering its dominant positioning in the market, we believe Uniswap indeed has the pricing power to turn on a 15%-20% fee switch. This is an appropriate ratio as Uniswap is already pricing itself as a public utility with take-rate as low as traditional exchanges like NYSE and Nasdaq.

  • The structural trend of geographical fragmentation of CEX liquidity gives Uniswap an opportunity to become the global liquidity layer. Our speculation is that Uniswap will naturally be positioned as the deepest market for everything crypto, and perhaps more.

  • From the perspective of token investing (NFA), we find

    • UNI is near cycle median-to-low with around 2-3x cyclical upside.

    • Early holders, team, and fund backers all seem to be diamond hands.


Content

  1. Status Quo: overall market share, capital efficiency, cross-EVM dominance

  2. Market Segment: long-tail assets, major Alts, BTC/ETH, stablecoins, LP side

  3. Revenue Breakdown: fee tiers, pricing power, take rate

  4. Optionality: the new liquidity layer

  5. New Products: UniswapX, Uniswap v4, other optionalities

  6. Investing: cycle, flow, tokenomics

  7. Risks: de-etherization, regulation, user behavior


Status Quo: Uniswap is the dominant DEX for the EVM Ecosystem

In this section, we will use a data-driven approach to show Uniswap safety dominates as the leading DEX in the EVM ecosystem.

Overall market share

Uniswap now dominates the DEX market with a volume share of 60%, more than what Binance does (47%) in CEX. Over the past six months, it has had a trading volume comparable to Coinbase, at 10-15% of Binance.


https://www.theblock.co/data/decentralized-finance/dex-non-custodial

https://www.theblock.co/data/crypto-markets/spot

https://www.theblock.co/data/decentralized-finance/dex-non-custodial


We see a combination of the following trends fueling the dominant position of Uniswap.

  • Inside DEXs, the AMM mechanism pioneered by Uniswap has won other paradigms like CLOB. Uniswap's position as the epitome of AMM has been solidified by v3 and will be furthered by v4, as they offer more flexibility and diminish the design space of alternatives.

https://www.theblock.co/data/decentralized-finance/dex-non-custodial

  • The aggregator thesis has been largely proven false. For two years, various aggregators have not gained real momentum. Most users and contract calls are directly routed into Uniswap.

https://dune.com/murathan/uniswap-protocol-and-aggregators

Capital efficiency

In addition to dominating market share in terms of volume, Uniswap is able to achieve its 60%+ DEX volume dominance with no more than 40% TVL.

We chose the largest pools on Uniswap and Curve for comparison. As for the USDC/ETH pool on Uniswap v3, it has a 24-hour liquidity utilization ratio ranging from 80%-200%. The 3pool on Curve is 30%-40%.


https://exchange.keklytic.com/

https://info.uniswap.org/#/pools/0x88e6a0c2ddd26feeb64f039a2c41296fcb3f5640

https://curve.fi/#/ethereum/pools/3pool/deposit


Cross-EVM dominance

Uniswap is also able to replicate its success in most other EVM ecosystems beyond Ethereum L1. The Top3 markets of Uniswap today are Ethereum, Arbitrum, and Polygon, which altogether contribute over 70% of DEX volume.


https://www.footprint.network/@1chioku/Uniswap-Cross-Chain-Dominance

https://dune.com/queries/2180075/3571504


To put it more quantitatively: (we used Sept. 7 data)

  • Ethereum 7d Dex volume(5.1B): Uniswap(3.4B)>>Curve>Maverick~>DODO

  • Arbitrum 7d Dex volume(1.1B): Uniswap(0.7B)>>Trader Joe, DODO

  • Polygon 7d Dex volume(662M): Uniswap(225M)>MetaTdex>QuickSwap

  • Base 7d Dex volume(150M): Aeroswap(46M)>Uniswap(40M)>BaseSwap>Sushiswap

  • BSC 7d Dex volume(1.7B): PancakeSwap(1.4B)>>>DODO, Thena, Uniswap


Market Segment: Uniswap is the best option for BTC/ETH/Alts traders and LPs

Moving on from ecosystems, we talk about Uniswap's positioning in different asset markets. For the purpose of this discussion, we divide the market into four categories:

  • Stablecoins (e.g. USDC/USDT, stETH/WETH)

  • Majors (e.g.BTC/USDC and ETH/USDC)

  • Major Alts (e.g. LINK/USDC, AAVE/USDC, etc.)

  • Long-tail Assets (e.g. UNIBOT/WETH, PEPE/WETH, etc.)


We find that Uniswap has a dominant or very competitive position in most, if not all, of the categories.



Long-tail assets (Uniswap monopoly)


As to token coverage, Uniswap is going far ahead of all CEXs and Perp DEXs. The latter two have difficulty in reaching the vast long-tail market in a timely manner due to compliance/clearance and other institutional issues. A quick tour to CoinGecko yields a few takeaways:

  • There are 1110 tokens with 6M+ MC in total, only ~500 are covered by a CEX.

  • There are 200-250 different tokens with 100M+ MCap, only ~50 are covered by a Perp DEX.


If you look at the top coins in terms of 24-hour trading volume on different exchanges, you will find that Uniswap is the best place to trade meme-coins and synthetic assets.


https://v2.info.uniswap.org/home

https://www.binance.com/en/markets/overview


Major Alts (Not Uniswap's home court)

Major Alts are largely traded with leverage on CEXs and onchain perp dexs. This is an area Uniswap has not yet been involved. Besides, on-chain derivatives are still in their infancy, compared with the much-matured perp trading in CEXs.


https://www.theblock.co/data/decentralized-finance/derivatives/dex-to-cex-futures-trade-volume


BTC/ETH (Achieving CEX-level liquidity)

In the May 2022 report, Uniswap Labs revealed that Uniswap v3 had up to 3x deeper liquidity in ETH/USD, ETH/BTC and other ETH pairs than leading CEXs. And that outcome had remained unreversed for at least 4 months since the end of 2021.


https://blog.uniswap.org/uniswap-v3-dominance


Here's the detailed methodology we used:

In order to verify if the situation has changed so far, we took a rough look at the market depth of Uniswap v3 and CEXs. Because of the difficulty of getting continuous data over a certain time period, and also for convenience, we base our analysis on the snapshot for September 1st, 2023.

We first obtain the ±2% depth data of Binance and Coinbase from CoinMarketCap. We choose USDT pair for Binance and USDC pair for Coinbase as they have the deepest liquidity. Since Uniswap is an AMM and does not really have market depth data, we input the amount of capital required for the ±2% price change into Uniswap v3, and see how much price impact would be caused.

Here is our result and findings.



  • For BTC/USD, Uniswap v3 performs slightly better than Binance and Coinbase. This is based on the fact that BTC/USDT is the 2nd most used pair on Binance, while the same pool ranks 33rd in terms of TVL on Uniswap v3.

  • For ETH/USD, Uniswap v3 controls the price impact much better on the ±2% depth level. The USDC/ETH pool is the most popular on Uniswap v3, and has ~3x 24h volume than Coinbase at the time we check.

  • For ETH/BTC, Uniswap v3 strengthens its lead by limiting the price impact to a mere 10% of Coinbase. This is understandable as users of CEXs tend to trade spots with USD, not ETH.

  • One may say CEX has dynamic MM activity to add more liquidity just-in-time. On this, we point to that fact that just-in-time liquidity is probably as much a thing on Uniswap V3 as it is on CEXs.

  • Overall, users who carry out ETH-based large trades will find a better experience from Uniswap v3 than Binance or Coinbase.

Stablecoins (Taking over Curve)

Uniswap and Curve for long are seen as the two main players in the stablecoin swap war. Though Curve still has an advantage in big stablecoin swaps after its TVL recovery from the hack, Uniswap has gradually proceeded in trading volume.

  • Uniswap v3 is taking on Curve to be the primary venue for stablecoin trade, with a 90% lower TVL.

  • As for ETH/USD pairs, Curve loses big in TVL and volume.

  • The volume and TVL of Curve 3pool show a week-over-week downward trend.


https://dune.com/sqlgod/dex-metrics-stablecoins

https://info.uniswap.org/#/pools

https://curve.fi/#/ethereum/pools

https://dune.com/1ronman/Curve.fi-3pool


Story from the LP side

A quick tour of Defi Llama reveals a similar story from the LP side. Uniswap is optimal for LPs in any scenario other than stablecoins --- USDC/DAIs may find higher returns in lending protocols.


Revenue Breakdown: Uniswap has the pricing power to turn on fee switch

In this section, we break down Uniswap's revenue streams. We also further investigate its pricing power and try to prove Uniswap indeed has the pricing power to turn on a 15%-20% fee switch.


https://www.theblock.co/data/decentralized-finance/protocol-revenue


Different fee-level distribution and contribution

Uniswap V2 and V3 each has its own niche. Uniswap v2 handles high-frequency trades of ETH/shitcoin pairs, and v3 focuses on large ETH/USD and ETH/Alts trades.


https://dune.com/mtitus6/Uniswap-V2V3-Comparison


Uniswap V2 has a flat 0.30% fee for all pools. Uniswap V3 offers LP four fee tiers per pair --- 0.01%, 0.05%, 0.30%, or 1%.

  • Overall tokens tend to be deposited and swapped in pools with lower rates, as pools with low rate and high volume are beneficial to both LPs and users.

    • For USDC/ETH, 0.05% pool is 3x the TVL of 0.3% pool, 30x the trading volume.

    • For PEPE-ETH, 0.3% pool is 20x the TVL of 1% pool, 170x the trading volume.

  • It appears that LPs have reached a certain equilibrium in which they believe that 0.05% provides the best balance between trading volumes and fees. This tier contributes 61% of the volume and 44% of the revenue.

  • Although Uniswap v3 beat Curve in terms of volume by setting a 0.01% fee tier for stablecoin trading, stablecoins are actually not among Uniswap's main businesses, accounting for less than 20% of volume and 1% of revenue.

  • In contrast, 1% of pools are real money-making machines, leveraging 3% of total volume to 28% of revenue.


See the chart below.


https://dune.com/Henrystats/uniswap-pool-analyzer

Does Uniswap have the pricing power to turn on the fee switch?

The latest fee switch proposal by GFXLabs suggested a 20% fee in Uniswap v3. Uniswap v2 factory contract also has a function of enabling a 16.7% fee. So we think a 15%-20% fee is a reasonable community consensus.

In the previous section, we made the point that Uniswap is optimal for most LPs. Our estimates show that even after a 20% fee switch, Uniswap remains competitive for LPs in most cases.


  • ETH/BTC LP


  • Major Alts LP


  • Shitcoins LP


Compare take rate to traditional exchanges and confirm

How does Uniswap's fee compare to traditional exchanges like NYSE and Nasdaq? Some worry its take rate might have to reduce as it becomes something more akin to a public utility. To investigate this concern, we compare Uniswap's average take rate with that of U.S. Spot equity exchanges.

We find that major U.S. Exchanges like NYSE and Nasdaq charge around 1-2 basis points of total trading volume as an exchange fee. On the Uniwap side, the volume-weighted average take-rate as a % of the total traded volume is also around 2 basis points.

So Uniswap today is already pricing itself as a public utility. There is probably not much lower to go in terms of exchange fees.



Optionality: Uniswap can be the global liquidity and value discovery layer

Having discussed Uniswap's present, in this section we move into more speculative waters. We will discuss a few areas where we might see further volume growth or horizontal expansion.

  • The fragmentation of CEX and Uniswap as the global liquidity layer

  • Uniswap Wallet and Uniswap X

  • Uniswap V4

There is a clear DEX v. CEX secular uptrend with space to go. DEX spot trade volume is now 16% of CEX, ranging from 10% to 20% since the beginning of 2023. "The next bull run may very well make DeFi bigger than CeFi," says CZ in his AMA space. "I think the more decentralized the industry becomes, the better".


https://www.theblock.co/data/decentralized-finance/dex-non-custodial


The structural trend of Binance unbundling has also become clearer than ever since the beginning of 2023. CEXs are having trouble with regulators all over the world. Localized compliance is becoming more and more costly. People are consistently reminded of the inherent centralization risk of CEXs in extreme markets. As a result, we have good reasons to believe that there will be a geographical fragmentation of CEX liquidity. It actually has begun to take shape.



Amid CEX's geographical fragmentation, Uniswap has a unique opportunity to become the open liquidity layer where global price discovery happens. This can be done by cross-market MMs and Arbitrageurs who frequently synchronize any price differences. Since we have shown that Uniswap has already taken over Binance in most crypto markets' depth, Uniswap is naturally positioned to be the deepest market for everything crypto, and perhaps more.



New Products: Uniswap's ambition as the DeFi gateway revealed

Given Uniswap's DEX dominance today, we view its new products primarily as open-ended strategic trials rather than mere product improvements. That is to say, we don't expect V4, UniswapX or Uniswap Wallet to have an immediate quantitative impact on key metrics. Instead, we watch their qualitative developments as Uniswap Labs explore the frontier of DeFi products.

UniswapX and Uniswap Wallet

The beta release of UniswapX is now accessible through the Uniswap interface on Ethereum. It will gradually roll out to other frontends and chains, connecting well with Uniswap Wallet.

For now, we don't see a clear traction of this product.

  • Many RFQ/OTC marketplaces have tried and failed before, though Uniswap may be different. But we are not sure how big the TAM is.

  • This action alone probably would not drive the volume of Uniswap but could cannibalize the existing Uniswap volume.

  • The possibility of a death spiral cannot be completely ruled out: Volume down (by frontend mm and MEV bots vanishing) - LP revenue down - Pool TVL down - AMM liquidity down - Volume down


But UniswapX has the potential to further strengthen Uniswap's gateway power and make it the preferred frontend for everything DeFi, fending off risks of commoditization or aggregation.



Uniswap v4

Uniswap v4 will be released after the Decun upgrade, probably at the end of 2023 or the beginning of 2024. The highly anticipated "Hooks" will open up a new design space for pools to write custom logic. For example,

  • Trading rewards in a certain pool

  • LP withdrawal fees or lockup incentives

  • Miscellaneous gas optimizations


Also, the brand new "Singleton" could bring a giant liquidity pool like never before, reducing the cost of liquidity fragmentation. But we can not speculate about the possible user behavior shift and its influence on the Uniswap ecosystem.

Other optionalities

In a July 18 Bankless interview, Hayden Adams said there are 2-3 new products lined up for later this year. Whether this will be real catalysts or normal upgrades is not clear yet.

Investing: Uniswap is at its cycle low with a 2-3x cyclical upside

In this section, we briefly address some additional considerations from the perspective of a token investor.

  • UNI is near cycle median-to-low with around 2-3x cyclical upside.

  • Early holders, team, and fund backers all seem to be diamond hands.

Cycle perspective

We made a conservative estimate of where Uniswap is located in the cycle. Here is what we find.

  • V2 and V3 revenue contribution split is around 1:3(18m : 54m) under current fee switch assumptions

  • V2 TVL and volume are near cycle median (50-80% of high)

  • V3 TVL and volume are at cycle low (30% of high)

  • So in terms of bounceback, there is around 2-3x upside.


https://defillama.com/dexs/uniswap


Flow and tokenomics

After tracking token holders 2+ years of age, we find that early holders of Uniswap are mostly diamond hands.

We took a look at people who have had UNI tokens on or before August 2021.

  • In August 2021, around 46% of all tokens were unlocked.

  • Nansen can account for about 39% of the 46% genesis/early tokens, and the majority of them have not sold. Of the identifiable wallets that have held UNI tokens since more than two years ago:

    • a16z: Still holds at least 60M of the 65M UNI token ever allocated to a16z.

    • Team: Still holds at least 128M of the 160M UNI tokens allocated to identifiable wallets.

    • Other early whales with 1M+ UNI: Still hold at least 130M of the 170M UNI tokens allocated.


UNI does not have a lot of sell pressure from unlocks.

  • On 2023.9.16, the speed of token unlock will decrease slightly.

  • More than 90% of tokens have been unlocked anyway.

  • UNI currently has no staking mechanism. When a16z finally proposes its fee switch plan, it will most likely create a UNI staking mechanism and shock supply/demand.


Risks: Uniswap is facing challenges from the real world

1) The transition from Eth-standard to USD-standard


Out of 226 hot pairs listed on Uniswap v2 and v3,

  • 174 pairs use ETH as either the base or quote asset, making up approximately 77% of the total.

  • 56 pairs include USDC/USDT/DAI, constituting around 25% of the total.

  • 5 pairs include BTC, accounting for roughly 5% of the total.


With the development of RWA and compliant stablecoins could come a dollarization trend in DeFi. We are unsure of the potential impact on Uniswap since stablecoin pairs are not at its core.

2) Regulation and delays, especially since the team is based in the US


As a globally well-known DeFi product whose team is headquartered in Brooklyn, Uniswap Labs, and VCs behind its back have been very cautious with regulation. The delayed tokenomics change and the unlisting of $HEX have aroused criticisms inside and outside the community, claiming that Uniswap is not real DeFi.

3) The unbundling of Uniswap


Uniswap somehow miraculously copied its dominance from long-tail assets to stablecoins, but theoretically, there is no strong correlation in different markets and chains. We have some confidence in Uniswap's brand value and its ability to quickly establish itself in new markets. But we recognize that we can never take it for granted.

4) Disintermediation by frontends like Coinbase and Hashkey exchange


Many of today's Uniswap users access Uniswap directly from the frontend. But going forward, more crypto users will likely onboard with client-facing brokers like Coinbase or Hashkey. Some worry that as Uniswap uses direct customer relationships, its take-rate will trend lower. However,

  • Uniswap's take rate today is already low at ~0.02% of volume. It's priced as a pure exchange without customer relationships.

  • Uniswap is actively pursuing customer relationships with its UniswapX and Uniswap Wallet offerings. This is pure upside optionality, and we do think Uniswap has a fight chance at becoming the customer frontend for "everywhere and everything else".


 

Authors:

Lydia

Researcher, Maverick Crypto

Asa

Research Lead, Maverick Crypto


Correspondence:

Telegram: @LydiaWu

Email: lydia@maverickcrypto.xyz

DMs are open.


Team:

Twitter: @GMMaverickCap

Learn more about Maverick: https://www.maverickcrypto.xyz/

For long-form essays and research deep dives: https://www.maverickcrypto.xyz/blog

For inquiries/media/outreach: ask@maverickcrypto.xyz


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