State of the Reactor: AMM Analysis - November 11, 2022

In this special State of the Reactor event, the Tokemak team presented an “AMM Analysis” that breaks down the profitability of liquidity deployments on Uniswap v2, Balancer 80/20, and Curve v2 in various scenarios.

State of the Reactor: AMM Analysis - November 11, 2022
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This presentation will be re-released by the team in a more detailed and official capacity at a later date.

Background

  • The object of this presentation is to identify the “best” AMM for a given token or pair.
  • The definition of “best” is based upon various characteristics, including volatility, volume, competition, and AMM configuration.
  • The team developed internal models in order to run these simulations in both competitive and non-competitive scenarios.
  • The key metrics to these scenarios are total return, fee return, and pool turnover.
  • The simulations began with a 1:1 price ratio between the paired assets.
  • The following results do not include any additional pool incentives, and assume static gas fees and no admin fees.
  • Total return equals size of reserves at start minus size of reserves at the end.

Results

Price Down Scenario: 65-85% sell volume (~60% negative price change)

Price Flat Scenario: 40-60% sell volume (~2% positive price change)

Conclusion

  • The team found that the ideal strategy is to optimize for low volatility periods and reduce risk during high volatility periods in order to minimize loss and maximize return.
  • The ability to tweak fee parameters on Curve v2 is a notable benefit over Uniswap and Balancer.
  • Balancer is an attractive option; however, the 50% admin fee reduces its real-world usefulness.
  • Uniswap v3 is hard to compare in these models, due to the need to actively manage liquidity positions.
  • Liquidity provisioning on AMMs is not well understood within the industry. The work done by the team is novel and offers insights that are not well-known across the automated market making space.
  • With the improved Reactor reward formulas, participants are rewarded based on performance. This aligns the various operators within the Tokemak ecosystem.
  • Gas prices will impact these results, but Curve is working on optimizations, and L2s will reduce the effects of gas fees.
  • Additional DEXs will be considered if they offer a competitive advantage over existing options. Some integrations with other DEXs have already been built; however, they will not be utilized if they are unprofitable for the system.
  • Stay tuned for additional information on accTOKE!
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