How should investors assess the performance of AMMs?

Biweekly newsletter no. 14

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Successful marketplace businesses unlock money to their supply-side participants. In the context of AMMs, this means that market makers (LPs) who deposit assets into an AMM expect to get back more than their initial deposit. To determine the long-term viability of an AMM, we need to develop tools that tell us how likely that is to happen.

Quantifying & comparing the performance of AMMs

In our new AMM dashboard,​ ​we’ve initially settled on two simple performance indicators that tell us about an AMMs capital efficiency and financial performance.

I) Liquidity turnover ratio (LTR)

What is the trading volume generated per $ of liquidity provisioned?
Calculation: daily GMV / daily average TVL.

  • The higher the LTR, the better the capital efficiency.

II) Return on investment (ROI) 

What is the gross rate of return generated per $ of liquidity provisioned?
Calculation: (daily Revenue / daily average TVL) * 365.

  • The higher the ROI, the better the financial performance.

Definitions:
TVL = liquidity provisioned
GMV = trading volume generated
Revenue = total trading fees paid

Cumulative GMV & Revenue figures for AMMs

Uniswap is a clear leader in terms of absolute GMV and Revenue.

Latest LTR & ROI figures for AMMs

DODO performs well on both LTR and ROI, although at a much lower scale than its competitors.

Uniswap’s historical LTR and ROI figures

  • Latest LTR: 0.35x

  • Latest ROI: 38.42%

Uniswap has been able to consistently maintain a high LTR and ROI.

SushiSwap’s historical LTR and ROI figures

  • Latest LTR: 0.18x

  • Latest ROI: 19.29%

SushiSwap is at a clear second place after Uniswap, when accounting for scale.

Balancer’s historical LTR and ROI figures

  • Latest LTR: 0.04x

  • Latest ROI: 5.40%

Balancer has not been able to reach similar levels of utilization and returns as its competitors.

Curve’s historical LTR and ROI figures

  • Latest LTR: 0.03x

  • Latest ROI: 0.47%

Curve has not been able to reach similar levels of utilization and returns as its competitors.

DODO’s historical LTR and ROI figures

  • Latest LTR: 0.75x

  • Latest ROI: 31.68%

DODO performs well on both utilization and returns, although at a much lower scale than its competitors.

Caveats for using LTR & ROI

  • Investors should always focus on long-term data. For example, token incentives may temporarily increase an AMMs trading volume and thereby trading fees paid, which means that the above performance indicators should be viewed on a long-term basis.

  • Absolute numbers matter. Ratios should always be evaluated against absolute figures, as it usually becomes much harder to maintain high performance at scale.

  • Note: For readers who want to learn more about the ​net returns​ of AMM deposits, we recommend checking out: https://research.paradigm.xyz/uniswaps-alchemy​.

Check out our new AMM dashboard.

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