[Strategy Paper] Hedged Liquidity Providing in Swaps (4/4)
In the earliers articles of this series, we have explained how to make passive income by providing liquidity in Uniswap, and the returns and risks associated with it.
There’re other platforms similar to Uniswap, all of which focus on providing trading pairs of Ethereum based tokens. Therefore investors do have choices, if you wish to provide liquidity for a certain pair, say, ETH and USDT, you will have a few choices. Some platforms offer better returns (Basic Earning + Mining Rewards) whilst investors bear the same level of impermanent loss risk and hedging costs (or gains). The trade-off is that not all platforms are bug-free and the newer the platforms, the higher the risks generally. So the returns do factor the platforms risks as well.
We will explain Balancer and Sushiswap here, to highlight the differences compared to Uniswap. For our strategies, we consider only Balancer, as it has a clean track record and has a decent level of assets deposited. We discount Sushiswap due mainly to its anonymous founder nature and the incident whereby the founder sold a large stake of the tokens very early.
Balancer is an AMM swap that works just like Uniswap, and its pools and volume are smaller. Whilst a trader still needs to look at individual pool, it generally suggests that the slippage in Balancer is higher than that in Uniswap.
Balancer has more flexibility in its pools than Uniswap. Firstly, each pool can contain up to 8 tokens. For instance, you can create a pool with all Defi tokens, such as CRV, UNI, BAL, COMP, LINK, MKR and some ETH and USDC. It’s arguable if it’s a more efficient way of trading between these tokens. But if you think from an investment point of view, this is just nicely a portfolio of Defi tokens, and automatically buy-low and sell-high.
Secondly, pool creators of Balancer pools are free to set the ratio between two tokens as well as the swap fees. E.g. you can create a pool of 80% ETH and 20% DAI, and have a trading fee of 0.5%. This gives flexibility to creators for achieving different objectives. For example, many projects acquire liquidity for their newly launched tokens by creating 98% token — 2% stablecoin (or ETH) pools.
Lastly, Balancer rewards liquidity providers of most pools (unlike Uniswap limited to 4 major pools). 145,000 platform tokens, BAL, are distributed weekly, roughly according to the amount of liquidity. We will explain the BAL award details in a later article.
Information on pool returns can be found in http://pools.vision/, a third-party calculator for Balancer returns, although not entirely accurate.
Balancer is founded by Fernando Martinelli, who has his full details in Linkedin.
SushiSwap is the second largest AMM Swap today. It was launched by a (or a group of) anonymous person(s) who called himself SushiChef. The entire project is a fork of Uniswap — a pretty nice and lenient term — but it means it’s a duplicate of the entire Uniswap codes. As Uniswap’s contracts are on Ethereum network, so it’s possible for anyone to just copy it. The good thing about it that as it’s just a copy of Uniswap, so its Ethereum contracts are as safe as Uniswap. But the disadvantage is also obvious, why would people use a duplicate version that’s exactly the same as the original one.
SushiSwap’s answer to this is to generously give out its platform tokens. In its early launch, the rewards of its platform tokens, SUSHI, can be a few hundred % APY. It further incentises investors to stake SUSHI-ETH for more SUSHI rewards, a very ponzi-like marketing approach. And it worked. In August, Sushiswap managed to attract 1/3 of liquidity from Uniswap; and Uniswap has to respond by offering its own liquidity mining reward program.
During the period, it’s anonymous founder sold a big chunk of SUSHI worth $20m (but later returned to the community as it claimed). Shortly after, the founder transferred the ownership to a crypto investor, the founder of FTX exchange, Sam Bankman-Fried.
Disregarding the history of Sushiswap, its AMM swap service charges traders a same 0.3% fee for any pair. Instead of giving all these 0.3% to liquidity providers, it keeps 0.05% to SUSHI holders (who staked). SUSHI rewards are given to the top 20 to 30 pools. Mining Rewards returns of some of the big Sushiswap pools can be found here https://coinmarketcap.com/yield-farming/ or on Debank. However, only 1/3 of the rewards are released immediately, the rest will be locked for 6 months.
As a respect to intellectual property rights (of Uniswap) and concerns over Sushiswap’s anonymous history, we do not invest in Sunshiswap, regardless of its yield.
(Serenity Fund, 28 Nov 2020)