Try Quests to earn cryptoLiquidity providers facilitate trade between assets. They do so by providing liquidity on both sides of a market. In traditional finance this role is filled by large institutions called Market Makers. Decentralized Finance allows anyone to combine two assets into a trading pair and become a liquidity provider.
Sushiswap is a protocol that uses liquidity providers. Sushiswap is used to trade one asset for another. Traders pay a small fee (0.3%) on every swap. This fee is sent to liquidity providers to reward them for facilitating trades.
In this post I present the volume of trades for the ten largest liquidity pools on Sushiswap. I also show the amount of fees collected by liquidity providers. At the end I estimate the forward yield of each pool based on the earnings collected from fees in 2021.
(Pools are ranked based on their total liquidity on January 9, 2022)
The largest pool on Sushiswap is the 'USDC stablecoin - Eth' pair. This pool can facilitate enormous trades with its massive liquidity of $312M.
The second largest pool is the 'Illuvium ILV - ETH' pair. Illuvium is a new game where players battle using cute monsters to earn tokens. Each monster is a unique non-fungible token. I am surprised to see this gaming token ranking second by liquidity.
The tenth largest pool is the Sushi token paired with Eth.
Trade volumes are even more impressive on a weekly basis.
Remember our 'Illuvium - Eth' pair that we looked at earlier? While it is the second largest pool in terms of liquidity, it does not rank as highly in terms of its trading volume.
What I like about Sushiswap is the impressive scale of this trading protocol. When listening to mainstream media, we can get the impression that crypto trading is a fringe activity. This misconception is shattered when looking at the actual volumes traded in these markets.
The forward yields above are an estimation of a year's fees expressed as a percentage of the current liquidity. The year's projected fees are measured based on all fees collected in 2021. The forward yield is calculated by dividing a year's worth of future fees by the pool's current liquidity. Since all fees are collected by liquidity providers, it is an estimate of the annual percentage yield that liquidity providers may receive.
There were more than $152M of swaps between the USDC stablecoin and Eth on January 06 alone. More than $450K were paid in fees to liquidity providers to facilitate these trades.
How profitable is it to become a liquidity provider? Profitability is based on the following factors:
- The amount of trading volume on the pool for which you are providing liquidity, and
- Your share of the liquidity.
It should be noted that there are more profitable pairs on Sushiswap. In this analysis I am only comparing the ten largest pools ranked by liquidity.
The two most profitable pools on our list were only ninth and tenth on our liquidity ranking. From this we can learn that it pays more to hold a larger share of a small pool. Don't be a small fish in a large pool.
Three of the ten largest pools are stablecoins paired with Eth. Amongst these three pairs, DAI-Eth generates the best yield. Dai also has a great reputation and track record, making it a good stablecoin to hold.
- Liquidity providers facilitate trades by providing liquidity on both sides of a market. They collect a 0.3% fee on the swapping of assets.
- 'USDC - Eth' is the largest liquidity pool on Sushiswap. In 2021 this pair collected more than $105M in swap fees.
- The 'Illuvium - Eth' pair has also gathered massive liquidity. Illuvium is a new game that cannot be ignored.
- There are large differences in the yields generated by different liquidity pools. Some pools collect less than 1% annual yield from fees, while others can generate around 100%.
- Returns to liquidity providers are a factor of trading volumes and size of the liquidity pool.
- The most profitable pool in our ranking is the 'Dai stablecoin - Eth' pair. Its forward yield is an estimated 105%.
In 2021, liquidity providers on the USDC-Eth pair have collected more than $105M in swap fees.
Thank you for reading this analysis. I hope you enjoyed it.
To get a crystal clear understanding of what determines profitability, we can compare the Dai-Eth pool (#1) with the USDC-Eth pool (#4). Notice that USDC-Eth has collected $105M in fees while Dai-Eth has only collected $56M. So how can Dai-Eth generate a 105% yield while USDC-Eth only generates 33% ? We get our answer by looking at the 'total value locked' (liquidity) of the pools. The Dai-Eth pool has a smaller ratio of liquidity to fees collected. Thus each liquidity provider gets a larger share of the fees.