Although ApeCoin does not currently function, it is a topic of considerable interest to traders, and the NFT market is also on fire.
On March 17, 2022, Yuga Labs, owner of the Bored Ape Yacht Club (BAYC) brand and related derivatives, launched Ape Coin (APE). Owners of BAYC and BAYC-related NFTs can claim large amounts of ApeCoin for free, and at the same time, the liquidity of the token is added to major exchanges such as FTX. Although ApeCoin does not currently function, it is a topic of considerable interest to traders, and the NFT market is also on fire.
However, although the emergence of ApeCoin once again set off the market heating up in the NFT field, Buterin Buterin judged in his “Times Weekly” article that the issuance of BAYC coins is meaningless and a form of gambling. From a fundamental point of view, after ApeCoin’s initial post-launch plunge, the token’s price rose 2.5x in the ensuing 24 hours, with a fully diluted valuation well over $15 billion. In the face of such price performance, what is the economic model behind ApeCoin, and where does its liquidity come from? Next, this article will reveal where the key liquidity source of ApeCoin is.
While the majority of ApeCoin volume occurs on centralized exchanges such as FTX and Binance, a significant portion of it also occurs on-chain, primarily via Uniswap on the Ethereum mainnet. In this post, we report the results of a preliminary analysis of the first 24 hours of on-chain transaction data, focusing on liquidity provider profits. Liquidity providers on Uniswap V3 earn revenue by charging transaction fees (a fixed percentage of all swap volumes). However, as prices fluctuate, they also suffer impermanent losses (IL), a phenomenon in AMMs where pools rebalance in the “wrong” direction associated with price movements. Therefore, whether liquidity providers are profitable relative to their portfolio of directly holding the paired assets depends on the balance between transaction fees and impermanent losses.
We show that while more than 86% of ApeCoin liquidity positions on Uniswap V3 are profitable compared to their opening investment balances, the majority of liquidity positions suffer impermanent losses that exceed their accumulated transaction fees, suggesting that typical liquidity providers It would be better to just hold the APE directly. The findings suggest that liquidity providers systematically underestimated the volatility of the ApeCoin price, causing them to narrow their positions and incur large and impermanent losses.
Immediately after the launch of ApeCoin on the centralized exchange, liquidity was initialized on Uniswap V3, first through the APE/ETH pool, and then through the APE/USDC pool about an hour later. There was an initial price spike and then a sharp drop. After a few hours of about $8 per APE, the price started to rise steadily, reaching highs above $16 by the end of the first 24 hours:
Apart from some heightened volatility in the first hour of trading (possibly due to severe illiquidity), the price of ApeCoin is very consistent across both APE/ETH and APE/USDC liquidity pools: this is not surprising, Because by default Uniswap will route swaps through multiple pools for best execution. Even price dislocations that do not exceed swap fees are brought back by arbitrageurs.
It’s worth noting that both APE/ETH and APE/USDC liquidity pools on Uniswap charge a 1% fee – higher than typical active pools (for example, ETH/LOOKS mostly trades at 0.3%), but not unprecedented (SHIB and other meme tokens tend to have a 1% fee tier). Given the strong trading interest in ApeCoin, this is an attractive incentive for users to step in and add liquidity for high transaction fees. Correspondingly, the number of open liquidity positions on Uniswap skyrocketed in the first 12 hours of trading, eventually stabilizing at around 650:
Interestingly, the vast majority of liquidity positions are generated in APE/ETH pools, not APE/USDC pools. Correspondingly, the APE/ETH pool also contains most of the liquidity in USD:
On average, both pools have similar liquid position sizes. As the chart below shows, all liquidity positions are below $10 million. However, the distribution of position sizes remains fairly broad, from positions of $100 or less all the way to the top seven figures.
One of the reasons liquidity providers might prefer APE/ETH is to minimize impermanent losses. In principle, the price of APE and ETH should correlate with the beta portion of the market; therefore, ETH is often the currency of choice for volatile, high-risk assets such as ApeCoin. On timeframes as short as 1-2 days, the price volatility of ETH is usually quite low, so APE/ETH and APE/USDC pools should not experience impermanent losses that vary widely. Nonetheless, liquidity providers clearly prefer to provide liquidity to APE/ETH rather than APE/USDC.
After a sharp drop in the first 6 hours, ApeCoin’s total Uniswap volume remained fairly high throughout the day:
We can already see immediately that providing ApeCoin liquidity on Uniswap can be a very beneficial endeavor. Look at the graph: Suppose we estimate a 10-minute volume of $3 million, which corresponds to a fee of $30,000. Multiplying by the number of 10-minute periods in a day and dividing by the total liquidity of $40 million shows that LPs returned about 10% in the first 24 hours (before accounting for impermanent losses). The current Uniswap estimated 24-hour fee of 11% of the TVL in the APE/ETH liquidity pool is confirmed by this calculation.
However, fee generation is not the only determinant of liquidity provider profitability!
Impermanent losses and expenses incurred
To better understand the rewards of providing ApeCoin liquidity, we also need to consider the phenomenon of impermanent loss. Because providing liquidity within a given price range is essentially selling a well-performing asset when it appreciates (equivalent to buying a relatively underperforming asset when it depreciates), a liquidity provider’s portfolio is expected to be strictly less than The performance of holding assets directly. However, liquidity providers may benefit if transaction fees are set appropriately based on trading volume and the degree of expected price movement.
As we observed earlier, the price of ApeCoin surged in the first 24 hours of trading. As such, the impermanent losses experienced by liquidity providers are expected to be considerable, and there is value in knowing whether they are actually providing liquidity that is worth it.
To this end, we estimate the impermanent loss incurred by each liquidity position. The liquidity of each liquidity position can increase and decrease multiple times between minting and burning transactions, which means that we have to be very careful to precisely define impermanent losses. For each liquidity position, we tabulate all liquidity addition events and track how many tokens of each type were added. We consider impermanent losses from the time the liquid position is minted until the liquid position is burned (if it was burned within the first 24 hours after initiation) or at the end of the 24 hours.
To define our baseline counterfactual that liquidity providers keep their tokens in their wallets and never create positions, we consider the following: For each liquidity addition event, it is assumed that the liquidity provider retains The same amount of tokens (APE, ETH, and/or USDC), but never minted or added to a liquidity position. What was their portfolio worth at the end of the evaluation period?
Next, we calculated the exact market capitalization of the liquidity position at the end of the evaluation period, which is entirely determined by the market price, the range of the liquidity position, and the tokens supplied. Finally, we assumed the difference between their hypothetical counterfactual portfolio value and their actual portfolio value at the end of the evaluation period without liquidity minting, and divided this difference by the total dollar amount of liquidity they provided value. The ratio is shown below.
The median liquidity position lost 0.3% of its initial portfolio value due to impermanent losses. However, the distribution of such losses has a long right tail, and on average, positions lose 9.4% of their initial stake to IL. (Of course, they may gain more from the appreciation of the potential ApeCoin risk.) In the worst case, some people experience IL of 100% of their initial stake!
As implausible as it may seem, manual inspection of the top three liquidity positions ranked by impermanent losses shows that these numbers are accurate:
#1 (204927) added 1ETH liquidity at roughly 150,000 times the current market price of APE and is currently down 100% beyond recovery.
#2 (205104) Added liquidity by 1,500 APE when the APE price was $6.56 with an initial portfolio value of $9,840. At the end of the evaluation period, the position was still open and the APE price was $14.78, near the upper end of its range; therefore, the position was mostly ETH with a total value of $13,964. Conversely, if the mint just kept 1,500 APEs in their wallets, they would be worth $22,170. The difference between the two is their impermanent loss of $8,206, which is almost 84% of their initial position value.
#3 (205949) added 50,470 APE of liquidity at APE price of $7.96. They set a very narrow range for liquidity positions. Specifically, 0.0029 to 0.0031 ETH per APE, $2,800 per ETH is about $8.12 to $8.68 per APE. At the end of the first 24 hours, their positions were still open and APEs were trading well above their range caps. Essentially, their range action is similar to a limit order, selling the APE from $8.12 to $8.68 in a row (roughly a 5% gain from the starting price), so they miss out on all subsequent price increases in the APE (more than cap) at $8.68 and their position is basically converted to 100% ETH).
Overall, given the steady uptrend in ApeCoin’s price action, the duration for which a liquid position remains open is closely related to the extent of impermanent losses:
While there is considerable variation based on the exact timing of opening and closing liquid positions, as expected, we see that keeping liquid positions open longer also leads to more Big impermanent loss.
Are accrued transaction fees sufficient to compensate for the severity of impermanent losses? To answer this question, we derive a basic estimate of the transaction fees realized by each liquidity position. At each 10-minute interval, we tabulate the liquidity positions that are open and within the range and the total swap volume for that interval. For simplicity, we estimate that transaction fees (1% of trading volume) are distributed proportionally to all active liquidity positions proportional to market value.
As we have seen, the trading fees earned are often in the tens of thousands of dollars depending on position size and duration. Dividing the incurred fees by the initial market value of the liquidity position, we find that the fees charged are, on average, insufficient to fully compensate for impermanent losses:
The median (respectively average) positions earned a fee of 3.3% (5.7%, respectively) of their initial principal. However, a significant percentage of positions far outperformed these statistics, with 21.9% of liquid positions earning more than 10% of their initial principal in fees. The strongest performer, ID 204926, managed to earn up to 33.1% of its initial value.
We can now directly subtract IL from the fees earned to see how likely the liquidity provider is to profit, relative to a hypothetical portfolio where they only hold APE and ETH/USDC instead of taking a liquidity position:
Therefore, the answer to our incentive question is no – most ApeCoin liquidity positions are not profitable in terms of impermanent losses and fees. Because many positions are both zero fees and impermanent losses (possibly due to permanent out of range), intermediate positions end up just right at breakeven. However, there are substantial long-tail losses, with the average liquidity position losing 3.8% of its initial principal in this calculation.
Note that this does not mean that most liquid positions are losing money relative to their initial state! Instead, this means that the balance of impermanent losses and fees tends to favor impermanent losses on most liquid positions during the first 24 hours of ApeCoin trading on Uniswap V3. If the liquidity provider is fully hedged (e.g. perpetual futures via an external exchange; assuming negligible funding fees), this can intuitively be thought of as a return distribution.
In fact, we can also check the total return of the liquidity position divided by the initial investment by adding the portfolio value at the end of the evaluation period (when the position is closed or at the end of the previous 24 hours) to our estimate of the accrual fee Combined value:
Of the nearly 1,700 liquid positions studied, 86% were profitable, the initial portfolio of intermediate positions achieved a return of 7.7%, and the average position achieved a significant return of 13.5%! Of course, the rise can also fall, and if the price of ApeCoin fell instead of rising, the liquidity provider would lose heavily. Ultimately, these results suggest that a typical liquidity provider may be better off not providing liquidity and instead holding ApeCoin directly to profit from its appreciation.
Comparing with Environmental Mobility
Providing centralized liquidity in Uniswap V3 has both benefits and risks. If the price remains within a predetermined range, liquidity providers can charge transaction fees with greater funding efficiency. However, liquidity providers face the prospect of severe and impermanent losses on deactivated positions that do not even charge any transaction fees if the price goes far beyond the position’s bounds.
As a point of comparison, it can be illustrated how liquidity through the more classical xy=k model (implemented on Uniswap V2 and still validly available in Uniswap V3 by setting a maximum range) will play out. This model is much simpler to analyze, the value of the portfolio scales proportionally to the square root of the risky asset (if we use ETH or USDC as denomination). Hypothetically, liquidity providers are simply adding context, xy = k liquidity, rather than defining narrowly concentrated positions. What is their return?
We found that, as shown below, impermanence losses are substantially reduced relative to the IL observed in the actual liquidity position data:
Notably, the worst case for IL lost only 15% of the initial portfolio value, contrary to our empirical observation of multiple >50% losses on users’ actual positions. Taking this a step further, subtracting this hypothetical xy = k IL from fees, it looks like the balance between the two is largely determined by profitability:
If all liquidity providers provided ambient liquidity, a full 95% of positions would benefit from fee balances, and only IL! This result strongly suggests that liquidity providers did not accurately estimate the extent of future price volatility or appreciation, and thus significantly underestimated the extent of their liquidity positions.
Location out of range
As we saw above, trading fees charged on liquid positions are considerable, even if they are not always higher than impermanent losses. In order to effectively charge transaction fees, liquidity providers must ensure that the scope of their centralized Uniswap V3 positions is wide enough. Otherwise, given ApeCoin’s strong directional price action in the second half of the time period we studied, their liquidity positions could be invalidated as prices exceed their caps. This will be doubly painful as they will miss out on ApeCoin’s price appreciation and all transaction fees derived from swap volumes after their positions are invalidated.
By tracking liquidity positions and pool prices over time, we can accurately calculate the proportion of open liquidity positions that were actually in range during the previous 24 hours:
Over 85% of APE/ETH and APE/USDC liquidity positions were in range for most of the first 12 hours. But as ApeCoin prices started to rise rapidly, APE/ETH holdings were as low as 50% and APE/USDC holdings were as low as 30%, indicating that liquidity providers were not anticipating the rapid upward trend and therefore set their position ranges too far narrow. Overlaying the price of ApeCoin over time on the same graph makes this trend particularly evident (note that the price of ApeCoin has been arbitrarily rescaled to fit the same vertical axis):
The above plot reveals an interesting dynamic. Overall, we see that the proportion of range liquidity by volume is generally higher than the proportion of individual unweighted positions in range, suggesting that larger liquidity positions are generally more likely to be in range. This phenomenon can be due to many different reasons. For example, on the Ethereum mainnet, transaction fees can be quite high; therefore, active management of liquidity positions is more valuable for larger position sizes, as the benefits of staying within range increasingly outweigh the fixed cost of paying gas fees. In addition, larger liquidity providers are likely to adopt a more sophisticated and proactive approach to liquidity management overall, where they continuously monitor price movements and rebalance positions as needed, or make more informed forecasts of future price movements , in order to set an appropriately broad range for its liquidity position.
Liquidity providers naturally do not want their positions to be out of bounds, so upper and lower limits should be placed on newly created liquidity positions to reflect expectations of future price movements. These expectations may change organically over time as new and existing liquidity providers observe ApeCoin price volatility. If we examine the cap on newly generated liquidity positions over time, we can see that this is indeed the case:
In particular, we see that as the price of ApeCoin rises in the second half of the 24-hour period, the upper limit of new holdings is disproportionate to the appreciation of ApeCoin (i.e. the upper limit is not always a constant distance from the current ApeCoin price). This suggests that as liquidity providers begin to watch ApeCoin’s price move upward, they are also upwardly revising their expectations for future price growth. A similar trend can be observed for the lower bound of newly created positions:
At the end of the first 24 hours, the minimum floor for new liquidity positions has started to overlap with the actual price of ApeCoin 18-24 hours ago.
Finally, to explicitly compare the efficiency of APE/ETH and APE/USDC liquidity pools charging transaction fees over time, we can take the swap volume for each pool at each point in time and measure it by active (in-scope) liquidity The number of normalized available at that time point. The ratio is plotted below (a log scale is used for clarity).
We see that fee accruals in the APE/ETH pool are slightly better than fee accruals in APE/USDC in terms of consistency and the absolute amount of fees charged on average. However, the difference is rather insignificant, suggesting that the implied market for liquidity supply keeps fees and TVL ratios relatively similar between the two pools. Note that there are several different factors implicit in this metric: trading volume, the overall amount of liquidity provided, and the percentage of liquidity that is actually provided within the range.
Providing liquidity on Uniswap V3 requires a clever balance of many different factors. Liquidity providers must forecast future price volatility and directionality and set an appropriate range for their concentrated liquidity positions to maximize transaction fees while minimizing the impermanent losses they face . Providing liquidity can be a very lucrative endeavor if done right; otherwise, it can be risky and sometimes costly.
The benefits of centralizing liquidity are enormous: Uniswap V3 allows arbitrary distributions of liquidity to be replicated in price, significantly improving capital efficiency and superior swap execution. However, these results highlight the importance of further development in the centralized liquidity DEX space. Future iterations of the model will provide greater guidance to liquidity providers and support active monitoring and management of liquidity positions, which will lead to the development of a healthy, self-sustaining liquidity supply ecosystem that is ultimately needed in the long term of. The long-term success of decentralized finance.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/is-it-worthless-to-be-judged-by-buterin-apecoin/
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