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.
TVL = liquidity provisioned
GMV = trading volume generated
Revenue = total trading fees paid
Cumulative GMV & Revenue figures for AMMs
Latest LTR & ROI figures for AMMs
Uniswap’s historical LTR and ROI figures
Latest LTR: 0.35x
Latest ROI: 38.42%
SushiSwap’s historical LTR and ROI figures
Latest LTR: 0.18x
Latest ROI: 19.29%
Balancer’s historical LTR and ROI figures
Latest LTR: 0.04x
Latest ROI: 5.40%
Curve’s historical LTR and ROI figures
Latest LTR: 0.03x
Latest ROI: 0.47%
DODO’s historical LTR and ROI figures
Latest LTR: 0.75x
Latest ROI: 31.68%
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.