Comparing the Profitability of DEXs
Not Revenue, Profit
The recent bear market has brought with it greater scrutiny over the tokenomics of various projects. The narrative has largely shifted from the pursuit of reflexive mechanisms, which work wonders during bull markets, to sustainable profit, which instead enables projects to endure through times of waning retail interest. Yet it is rare to see projects directly compared based on their profitability, and unfortunately there are few if any resources designed specifically for this purpose.
I have therefore undertaken the following research to compare major Ethereum and Solana DEXs (with a focus on the latter) based on their profitability. Profit will be defined as:
Profit = Revenue (protocol fees) - Expenses (liquidity mining)
In reality, projects may have expenses other than liquidity mining (e.g. team salaries, marketing, etc.) as well, but these numbers are usually not openly published. Finding the protocol fees and liquidity mining figures for each project was difficult enough; this involved joining their respective Discord servers and asking questions, sometimes persistently. Further, not all protocols share profits with their token holders and some protocols require you to lock tokens to receive your share. We have thus defined profit as we have in order to bypass these differences and compare protocols on a normalized basis.
The questions we would like to answer are:
Is the protocol making more money than it is paying out (protocol fees > liquidity mining)? This helps us evaluate whether the protocol’s current strategy is sustainable.
At what token price would the protocol be breakeven (profit = 0)? This provides us with one method of estimating the “fair value” of a token.
How much would token holders receive if they were paid a proportional share of the protocol’s profit (APR of profit on market cap)? This gauges the desirability of holding tokens assuming all revenue was distributed to holders.
How much profit is the protocol able to generate using its TVL (APR of profit on TVL)? This gives us an idea of how efficiently the protocol is able to utilize its deposited assets.
Before discussing projects individually, let’s look at the overall results.
The highlighted columns at the right provide the answers to the questions posed above.
Daily Profit is simply revenue minus emissions.
Breakeven Token Price is the price at which daily profit would equal 0, and Breakeven Price Change the % change in the token price to arrive at that price. This is interesting to think about but is not meant to be prescriptive; the figures should not be interpreted as what the tokens “should” be worth. It is simply one way of quantifying the difference between what a protocol is earning and how much value it is emitting through LM. (Note: it cannot be applied to projects without any LM.)
APR of Profit on Market Cap & TVL are calculated by treating the daily profit as yield generated on the market cap & TVL and converting it into an APR.
Although uninteresting from a data perspective, I feel obliged to include Uniswap since it generates the most volume among all DEXs.
Uniswap has neither LM emissions nor protocol fees, so it has no profit or loss. It does, however, have a “fee switch” that governance could at any point decide to turn on.
Turning on fees will no doubt increase profit, but it will also cause a cycle of decreasing LP fees → decreasing liquidity → decreasing volume → decreasing LP fees until an equilibrium is reached.
SushiSwap is a fork of Uniswap that has expanded to offer a variety of services.
SushiSwap appears to be one of the more sustainable protocols. I am not too familiar with their ecosystem, so I don’t have anything intelligent to say regarding why that might be the case other than that they have relatively low LM emissions.
Curve is the largest stablecoin DEX on Ethereum that has recently expanded to non-stable pairs.
Among the protocols included in this study, Curve has the greatest amount of LM emissions, more than 10x their revenue. Curve recently released their v2 pools, so it will be interesting to see whether they can meaningfully increase Curve’s earnings.
Serum is a central limit order book on Solana.
Serum also has a massive amount of LM emissions relative to the revenue it generates. It has a fully diluted market cap that is even larger than Uniswap, and this is partially what gives it so much leeway for providing incentives.
Saber is the largest stablecoin DEX on Solana.
While Saber generates a decent amount of volume, its extremely low fees mean the protocol makes very little in revenue, with the majority coming from the 0.5% withdrawal fee of its USDC-USDT pool. Regardless, its LM emissions are quite substantial relative to its revenue generated.
Orca is the largest Uniswap v3 style DEX on Solana.
Orca currently only collects protocol fees for their constant product pools and, like Uniswap, has yet to turn them on for their concentrated liquidity pools. Turning them on would increase profit but also decrease volume, so it’s difficult to judge how much of an impact it will have.
Raydium is a DEX on Solana that both has its own pools and also posts its liquidity on Serum’s order book.
Raydium has incentivized most of its pools with a steady stream of LM rewards, which at present outpace its revenue by a decent margin. With concentrated liquidity becoming more commonplace on Solana, it is becoming increasingly difficult for Raydium to capture the share of volume that it once did for major pairs.
Lifinity is a relatively new DEX on Solana with a number of unique features:
No LM emissions
The protocol owns most of the liquidity it provides (thus capturing 100% of fees for that portion of the liquidity)
Concentrates liquidity around an oracle price, significantly reducing or even reversing IL (i.e. generates a profit from market making by, on average, buying low and selling high without any type of price prediction)
Notably, Lifinity is the only DEX in this study that is generating a meaningful profit.
All DEXs are useful infrastructure to one degree or another; they enable market makers to provide liquidity and traders to take that liquidity for a fee. However, the presence of LM emissions are often an implicit recognition that traders, as the initiator of any trade, have the upper hand and thus that liquidity providers require extra compensation on top of just fees.
The necessity of LM emissions brings into question whether protocols can capture more value than they emit. Internet protocols such as TCP/IP are also incredibly useful yet fail to capture any of the value they create. Is this also the fate of most DEXs?
This also shines a light on why metrics such as TVL, volume, and revenue are much less useful than the frequency with which people reference them would seem to indicate; these numbers can be artificially inflated by increasing LM emissions. At the end of the day, if a protocol is not able to generate a profit for its token holders, do these metrics even matter?
Of course, profitability is not the end-all-be-all when considering an investment. How the protocol uses its profit also matters, and speculation plays a significant role in whether a token appreciates in price. But there is no way to quantify such forces; all we have to look at is the profit being generated at the present time. So it certainly seems like the right starting point for analysis, especially compared to the metrics mentioned above.
I hope this type of data becomes more readily available and a standard metric for comparing not just DEXs but other types of protocols (lending, leveraged yield farms, etc.) as well. I’m sure others would be able to collect this data more effectively than I have. Ideally someone would create a dashboard where the profitability of protocols could be monitored in real time. Wen?
Follow @durdenwannabe or subscribe to be informed of new releases.