Uniswap’s economic incentive mechanism is not well designed:
First, the time value of liquidity is not considered.
The incentive mechanism is unfair to the early liquidity providers. Uniswap is able to operate, relying on the liquidity providers to provide it with a lot of liquidity.
Early liquidity providers took more risks, and did not consider the higher time costs provided by early liquidity providers, and the V2/LP issuance model did not bring more benefits to early investors.
Uniswap relies on the gradual development of early LP deposit funds. As it becomes more and more popular, more and more large funds such as venture capital funds, exchanges, and mining pools have entered to provide liquidity.
Although the transaction fees have accumulated a lot, the share of early LPs has been diluted, and they have not been able to enjoy the long-term returns brought about by the growth of the agreement.
In addition, liquidity providers only earn transaction fees from the pool of funds when they provide liquidity. Once they withdraw their funds from the fund pool, they will no longer receive the corresponding income.
Second, the transaction risk exposure is large, and the certainty of returns cannot be guaranteed.
Providing liquidity for Uniswap can get transaction fees, but the transaction risk exposure is too large, which means that the DEX represented by the Uniswap model has a natural uncertainty.
Of course, when user liquidity exits DEX, it is actually a kind of asset rebalancing, which does not seem to affect the actual value of the currency held.
However, if the trading risk exposure is too large, which is actually greater than the fee income obtained, it will cause the exchange to have a reverse avalanche effect, that is, accelerated liquidity escape.
SuShiswap’s economic incentive mechanism is not well designed:
Overall, the incentive model of Sushiswap and Uniswap is the same, but SUSHI’s Token design model may have the risk of accelerating the death of Sushiswap.
Looking at the incentive model of SUSHI Token:
Sushiswap issued the platform currency SUSHI, and its transaction fee is also 0.3%. It divides the 0.3% fee into two parts, of which 0.25% is provided to LP, in the same way as Uniswap.
The remaining 0.05% will be used to repurchase SUSHI Token, that is, use this part of the money to purchase SUSHI Token in the hands of the holder.
This means that the value of SUSHI is linked to the transaction volume of the Sushiswap platform.
On Sushiswap, the greater the transaction volume, the higher the value that SUSHI captures. Like COMP, LEND, and YFI, SUSHI Token can also be traded in the secondary market.
In addition, in order to ensure the continuous development of R&D and operations, 10% of SUSHI Token will be used for development and future iterations, audits, etc.
SUSHI’s economic incentives have been improved on the basis of LP, because it guarantees the long-term value of early participants, so that early participants can get “top mine” rewards.
In terms of SUSHI’s main use, Sushiswap’s economic incentive mechanism is inherently insufficient, and SUSHI Token has two main uses:
One is for voting.
Vote to determine the proportion of 100 SUSHI generated in each block in the Token exchange pool and decide whether to open a new Token exchange pool.
This will result in a game between the distribution rights and the total amount of the fund pool, that is, a prisoner’s dilemma, and the result of the game is unknown.
The second is for the exchange fee of 0.05%, which may accelerate the depreciation of the spiral Token.
That is, if there is a decline in the transaction volume, then the infinite inflation of SUSHI and the declining fee share will interact, which will cause the newly generated SUSHI to become less and less valuable.
Anticipation of a decline in currency prices will make old currency holders rush to sell. If they withdraw funds from the liquidity pool again, the exchange’s liquidity will be insufficient, causing excessive transaction slippage, deteriorating user experience, and transaction volume will further decline.
Such a vicious circle will quickly cause it to suffer huge losses, which will cause its death to accelerate.
Sushiswap vs Uniswap
On the whole, Sushiswap may erode Uniswap’s market share, and the SUSHI Token issuance model will make Sushiswap’s operation more flexible and easy to form industry barriers.
But success is also Xiao He, and failure is also Xiao He. The SUSHI Token issuance model will accelerate the death of Sushiswap when the market shrinks or a bear market arrives.
Digital currency exchange
Generally speaking, the risk exposure of Crypto currency exchanges is outstanding, mainly focusing on the following aspects:
1. Technical risk
Potential code vulnerabilities and data standard risks naturally exist. This is a systemic risk in the DEX industry, and the only way to solve this type of risk is to look forward to technological progress.
This also means that with the continuous innovation of technology, the iteration of the exchange circle will be very rapid and cruel.
This can create huge opportunities for many small exchanges. Seizing the technology and opportunities will soon be realized first.
2. Economic model risks
Many blockchain projects, especially in the DeFi field, need to rely on the economy to incentivize network participants. Sometimes economic models seem impeccable, but they contain potential risks.
From the analysis of Uniswap and Sushiswap, the first is that the trading risk exposure is too large, and it is to provide liquidity for currencies with large price fluctuations, the greater the probability of risk.
This will cause users to provide liquidity for DEX (that is, liquidity mining) to bring less profit than trading losses.
External risks refer not to the risks inherent in Uniswap and Sushiswap, but the risks in their online projects.
How far can a DEX without asset collateral go? When will the trading depth limited by policies, regulations, and supervision be limited? Everything is still walking in the fog.
For AMM, the shortcomings and shortcomings are also very prominent, mainly due to the following aspects:
Slippage: high slippage, especially unfriendly for large transactions;
Low capital utilization rate: The high degree of capital idleness hinders LP’s fee income;
Impermanent loss: LP loss caused when asset prices fluctuate and deviate from asset prices in the fund pool;