According to Footprint Analytics, as of February 25, there were 372 DEX protocols, for a total TVL of $62.3 billion, above 30% of the total DeFi.
The top 5 TVL DEXs are Curve, Uniswap, Sushiswap, PancakeSwap, and Balancer. Many DEXs have similar models, but their token economies are not identical. Curve is the largest, but as a stablecoin trading platform, it is slightly different from the others. Therefore, his article will compare the token economies of the other four.
Footprint Analytics – Top 20 Dex TVL on different networks
The first of the 4 to launch was Uniswap as a pioneer of the AMM, in November 2018. But it issued the UNI token two years later, making it the last. Balancer, Sushiswap and PancakeSwap issued their tokens (BAL, SUSHI, CAKE) in 2020.
Starting in September 2020, UNI will take four years to complete its initial issuance of 1 billion tokens, after which it will be issued in increments of 2% per year for perpetual inflation, to ensure passive UNI holders can continue participating and contributing to Uniswap.
Sushiswap essentially duplicates the core design of Uniswap, but issued a governance token upon launch. It had unlimited issuance when it went live in August 2020, which was then voted on by the community to a maximum of 250 million. It will launch entirely through liquidity mining in November 2023, and block rewards will drop every month until then.
PancakeSwap is a DEX based on BSC. To keep LP incentivized at all times, CAKE doesn’t have a hard cap, but it hasn’t been affected by selling pressure like UNI was when it launched, mainly to take advantage of its deflationary mechanism.
The emission is reduced by reducing the number of CAKEs minted per block, and there are a series of burning mechanisms, such as burning 20% of the CAKEs when a lottery ticket is purchased. According to Footprint Analytics, the current circulation is 272 million.
Balancer launched in March 2020 and opened for liquidity mining in June. It features LPs that can customize the ratio of assets in the pool and supports a multi-asset portfolio.
The maximum BAL offer is 100 million. Annually 7.5 million BAL are distributed through liquidity mining, which will take 8.67 years. BAL’s release rate is much slower than other projects, and in this way you can reduce your selling pressure in the secondary market.
The allocation of tokens reflects the degree of decentralization of the project.
UNI’s initial issuance will be based on a distribution plan of 60% to the community, 21.266% to the team, 18.044% to investors and 0.69% to advisors. The last three are set for a 4-year vesting period.
Of the 600 million in the community, 150 million have been airdropped to old users, also released through 4 pools of 5 million each completed liquidity mining rewards. The remaining 430 million will be released over four years in decreasing annual numbers.
UNI 4 Year Release Schedule
SUSHI is distributed through liquidity pools of 4 million per week. To ensure continuous development and operations, 10% of SUSHI is allocated to the development team.
Since CAKE has an unlimited supply, its distribution is slightly different from the others. 10.62% goes to Farms and Lotteries and 25% to Jarabe Pools.
Distribution of CAKES
65% of the maximum BAL issuance of 100 million will go to LP, 25% to founders, options, advisors and investors, 5% to ecosystem funds and 5% to fundraising funds. The portion allocated to founders, options, advisors and investors is also set with vesting periods.
Balancer takes a more active approach to decentralization by increasing the percentage of BAL held by the community and decreasing those by the government.
Utility and Obtaining Tokens
Users can earn these tokens by trading them on the exchange or by contributing to the community. In addition to UNI, all tokens can be mined to provide liquidity, and CAKE can also be won through the Lottery.
As for governance tokens, token holders can participate in community proposals or votes to determine how the protocol works. There is no shortage of external utilities, especially for UNI in Compound, MakerDAO, and Yearn. CAKE has a wide range of utilities in BSC and can continue to mine other tokens by depositing them in external protocols.
Furthermore, the utilities for different tokens are also different.
UNI cannot capture protocol rates. While capturing capacity mitigates selling pressure, UNI’s four liquidity mining pools, which stopped mining in November 2020, also mitigate potential selling pressure.
SUSHI has a higher symbolic economic incentive over UNI, with long-term fee sharing for SUSHI users (xSUSHI holders). 0.25% of the 0.3% fee paid by merchants is distributed directly to LPs and the remaining 0.05% is distributed to SUSHI participants as an incentive.
The higher the volume traded on the protocol, the more revenue stakeholders will receive and the more the long-term value of the LP and the protocol will combine. However, as more and more SUSHI is mined, the ability to profit from the same amount of SUSHI gradually dilutes. That forces LPs to continuously offer themselves to acquire more SUSHI.
On PancakeSwap, users can use CAKE to mine more tokens or buy lottery tickets.
While BAL has fewer utilities than other popular protocols, Balancer announced plans to design veBAL for community governance and revenue capture, keeping in mind the Curve token mechanism.
Users can get BPT (Phantom Pool Tokens) with 80/20 BAL-ETH by providing liquidity and then lock the corresponding veBAL for 1 week to 1 year. veBAL is similar to veCRV in that you can vote on the pool share of the reward and distribute 75% of the protocol revenue to veBAL holders.
Analyzing the data
The economic models of the above 4 DEX tokens are summarized below.
Footprint analysis: DEX token economic model
According to Footprint Analytics, BAL has the highest token price as of February 25 at around $12. UNI is next at around $9. DEX is not that high overall.
BAL is trying to achieve decentralization by lowering the team’s token allocation ratio to gain more preference from users. At the same time, due to its long token issuance period, the dilution of the token value is slowed down. It still ranks first after the price drop in May.
Footprint Analysis: DEX Token Price
But in terms of market capitalization, UNI ranks first ($4.2 billion) and BAL last ($130 million) due to only 10 million in circulation.
Footprint Analysis: DEX Token Market Cap
In terms of daily transaction volume, UNI, SUSHI and CAKE are among the top, while BAL is not as active due to fewer external utilities.
Footprint Analysis – DEX Token Trading Volume
The economic model of different tokens is clearly reflected in the data, such as the sell-off caused by the early issuance of SUSHI with no cap. Therefore, it is necessary for users to have a detailed understanding before holding.
It also leads us to consider whether a platform that issues tokens through liquidity mining is a protocol for short-term success or long-term development.
Only a protocol with real value can add more TVL to the platform through such incentives and make it more decentralized through the community. Protocols that lack real value often face collapse at the end of the incentive, and the token will be worthless. Uniswap maintained its TVL rating even after it stopped mining liquidity, showing its market value as an AMM pioneer.
The economic model of the tokens seems simple, but the inflationary depreciation of the value during issuance, the utilities of the tokens, and how they can continue to be incentivized after the liquidity extraction ends are critical to their long-term value.
This piece is contributed by the Footprint Analytics community.
Date and author: March 04, 2022, Simon
Data Source: Footprint Analytics DEX Token Dashboard
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This post This is how the token economies of the top 4 DEXes work
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