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The DEX Brief No.3

The most recent trend in DEXs is a race to the bottom in fees.

Written by

Mark Lurie

Published on

December 3, 2021

Top of mind at Shipyard


The most recent trend in DEXs is a race to the bottom in fees. Uniswap governance introduced a 1bps fee tier and has since been gaining market share, largely at the expense of Curve.

But lowering fees isn’t necessarily sustainable. If trade volume doesn’t rise enough, it can result in lower overall protocol revenue and magnify the negative impact of impermanent loss. If LPs lose money, then low fees won’t be sustainable and the market can fail.

Indeed, this already may be happening in large pools. The Bancor team published an excellent analysis of Uniswap V3 pools showing that on a sample of Uniswap V3 pools covering almost half of all TVL, LPs lost $260m to impermanent loss and only made $200m in revenue. In other words, they lost money. Why then, haven’t these pools failed yet? Because the data isn’t apparent unless you do the math on what your assets would be worth after providing liquidity versus HODL’ing. Liquidity provision under these conditions begins to lose its appeal when you consider the rates and yields you can get elsewhere in DeFi.

This problem will likely persist as long as DeFi projects prioritize narratives that are centered on gross protocol revenue and gross APY rather than net protocol revenue and net APY. It may take a while, but at some point we expect reality to bite.

Shipyard Insights


It’s clear that crypto is here to stay, but some aspects of this industry continue to confuse and confound. Shipyard’s new podcast, “WTF Crypto?”, demystifies the industry in a way that is both entertaining and actionable. Our first two episodes explore the concepts of liquidity pools and pseudonymity — tune in today!



DEX headlines that caught our attention


What we're reading


Looking for a high-level glimpse of the current DeFi landscape? Delphi Digital’s recent post on MetaMask Revenues, Trading Fees, and the ongoing DEX Aggregator Wars, is a good place to start.

Ethereum scaling solutions are all the rage these days, and it’s worth knowing the difference between Optimism and Arbitrum?
This technical paper takes a closer look at how liveness separates constant function market makers (CFMMs) and order books, and why this matters.

Uniswap v3’s liquidity pools are not optimized for any particular type of user. This recent paper on impermanent loss in Uniswap v3 shows that many LPs would have been better off just HODLing.


Clipper project updates


Clipper’s Polygon Community Liquidity Program is up and running! We’ll share more details on this once the CLP wraps up.

The first chapter of Clipper’s new ambassador program, Adventure to Polygon Isles, offers an immersive way to get involved with Clipper’s ongoing developments.


Enjoy your DeFi journey,

The Shipyard Team

Written by

Mark Lurie

Published on

December 3, 2021

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