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Back to Basics: Uniswap Analysis

July 18, 2023

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Welcome to the first article of our Back to Basics Series. In the midst of this bear market, we will be deep diving into some of the blue-chip protocols and their native tokens that we believe have already shown value and why these protocols could potentially outperform the market on the long-term horizon. The first piece of the series focuses on Uniswap.

Table of Contents

  1. About Uniswap
  2. Uniswap Recent Trading Activities
  3. Token Utility
  4. Uniswap DAO
  5. Token Release Schedule
  6. Dumping Pressure Analysis
  7. Recent Development
  8. Revenue Stream
  9. Revenue Analysis
  10. Competitive Analysis
  11. Pricing Performance
  12. Conclusion

1/ About Uniswap

Uniswap is a decentralized trading protocol known for its role in facilitating automated trading of decentralized finance (DeFi) tokens. The platform creates more efficiency by solving liquidity issues on the Ethereum network along with scaling solutions such as Optimism, Arbitrum, and Polygon.

Recognized as the pioneer among decentralized exchanges (DEXes), Uniswap famously popularized the X*Y=K constant product pricing curve in V2, and then for its concentrated liquidity and staggered trading fee in V3.

2/ Uniswap Recent Trading Activities

The crypto market has declined for more than 50% in market capitalization this quarter compared to the previous quarter. However, Uniswap’s Q2 2022 trading volume was only down 8.7% compared to the Q1 2022 (see Figure1 below). We believe this relative success is partially attributable to market volatility, which benefits DEXes because they serve as the backbone of the cryptocurrency economy and are in high demand when prices are erratic. The activities of arbitrage bots in the system could be another crucial aspect. Research shows that up to 75% of all trading volume can come from bots when users leave the market.

Figure1: Uniswap Transaction Volume

3/ Token Utility

Governance: UNI holders are in charge of governing the protocol. One of their main responsibilities is to create and vote on proposals that potentially can dictate the future direction of Uniswap. Other obligations also include managing the funds held in the treasury and determining the tokens that belong on the Uniswap default token list.

Provide Liquidity: Anyone possessing ERC-20 tokens, including UNI tokens, can contribute liquidity to pools in order to collect token rewards. Users can provide UNI to give liquidity to pools with significant trading volume.

4/ Uniswap DAO

At the time of writing, the Uniswap DAO has over 342,900 members to vote over $2.5B treasury, a top-ranked DAO in terms of the amount held in the treasury. It is currently ranked second in terms of total governance token holder, behind Polkadot.

The DAO members have been actively proposing suggestions on protocol development. For instance, in mid-July, Uniswap went live on Celo after passing the governance proposal. Uniswap Grants Program recently revealed its allocated funding, with Wave 8 as the program’s final and largest batch of grants ever given.

5/ Token Release Schedule

The UNI token is vested according to a four-year schedule.

  • 60% of the UNI token (600,000,000 UNI) goes to the community members.
  • 21.51% (212,660,000 UNI) to development members and future employees within a 4- year vesting period.
  • 17.8% (180,440,000 UNI) tokens allocated to investors with 4-year vesting.
  • 0.69% (6,900,000 UNI) for advisors with 4-year vesting.

Figure2: UNI Token Release Schedule

6/ Dumping Pressure Analysis

We examined UNI’s potential unlock-led dumping pressure over a period of 1, 3, and 6 months. These estimations are made by timing the number of tokens to be released over UNI’s past accumulated trading volume over that period of time.

The calculation shows that token unlocking may only bring a limited impact to the price. The impact scale could remain relatively consistent throughout the different time frames, mainly because most of the UNI tokens are already in circulation. The 4-year vesting started in September 2020 and it is expected to end in September 2024. So by the end of July, 71% of UNI will be in the circulating supply.

7/ Recent Development

Uniswap had several key updates over the past quarter.For example, the protocol deployed one basis point fee tier on Polygon to attract new users and grow the protocol. On the investment side, Uniswap launched Uniswap Lab Ventures to continue investing in Web3 projects and participate in Web3 governance. Uniswap is also gaining institutional exposure by integration with Coinbase Dapps, which means that users on Coinbase are able to access Uniswap directly through the Coinbase wallet.

Most importantly, Uniswap recently acquired the first NFT marketplace aggregator, Genie. The strategic investment aims to expand Uniswap’s user base, extend into the NFT sector, and to improve user experience by merging multiple ERC-20 and ERC-721 platforms into one.

8/ Revenue Stream

Uniswap generates revenue in two ways: trading fees and UNI tokens. Traders pay a nominal fee to Uniswap each time they complete a trade. Multiple factors could affect the amount of this fee, including the size, type, and volume of the pool where the transaction happened. Unlike other similar protocols, Uniswap has the option to treat these fees as protocol revenue.

Uniswap is obligated to reimburse the LPs providing liquidity to the pool. Most fees are returned to the liquidity providers, but Uniswap keeps a small fraction of these fees in some trading pools. The UNI governance token is the other revenue stream for Uniswap. The token allows UNI holders to vote on proposals, such as fee structures, and to trade on the DEX.

It is noteworthy that Uniswap does not have any protocol revenue right now. However, this is subject to change as a 10-25% protocol fee switch can be implemented in Uniswap V3 if governance allows.

9/ Revenue Analysis

Compared to other major DeFi protocols, Uniswap currently has around $1.83B annualized revenue based on a 30-day sample. In contrast, other major protocols, such as SushiSwap and Aave, only have $55.91 million and $53.01 million annualized revenue respectively.

Figure 3: Annualized DeFi Revenue by Protocol (30-day sample)

Uniswap’s revenue model also seems able to withstand market volatility. Since the broader crypto market started this down cycle in February 2022, Uniswap’s monthly revenue has remained relatively stable, with a Month-on-Month (MoM) decline rate of 11.33% between February to June 2022. Its competitor SushiSwap, however, has a negative MoM revenue drop rate of 19.38% within the same period.

Figure 4: Monthly DeFi Revenue

10/ Competitive Analysis

We compared some of the key market and valuation metrics of the leading DEXes in the market and found out Uniswap has been enjoying notable advantages over other top DEXes, including SushiSwap and PancakeSwap.

At the time of writing, the fully-diluted valuation of Uniswap and PancakeSwap are $8.26B and $2.58B respectively, with a valuation gap of 3.20x. If we look at the trading volume, Uniswap handled $449.04B, which is a 7.8x and 26.0x larger volume compared to PancakeSwap and SushiSwap. According to the liquidity provider (LP) fees collected by each platform, the price-to-sales (P/S) ratios of Uniswap and SushiSwap are 15.12 and 6.7 respectively. It means investors see the value of Uniswap 2.26 times higher than Sushiswap for the same amount of LP fees collected.

Since SushiSwap has been taking an expansionary approach and widening its product line, the PS ratio difference could also mean that investors may see a higher sustainability risk on SushiSwap over the long term. In comparison, the same risk could be notably smaller for Uniswap.

Source: TokenTerminal and DeFi Llama

11/ Pricing Performance

From our pricing analysis, there are two key findings:

  1. There has been a strong correlation on pricing movements between UNI and ETH
  2. Other than the volatility of global markets, inflation and fed rate affect pricing the most.

The figure below illustrated the price correlation between UNI, SUSHI, and ETH, as well as some key events to pay attention to:

Figure 5: Price Correlation Between UNI, SUSHI, and ETH

The key indicator can be broken down into the 7 instance below:

  1. Oct 2020: UNI went live in Sep 2020.
  2. Jan 2021: Uniswap airdropped 4% of the total supply to its users; SushiSwap announced merging with Yearn finance; ETH grew over $1k with global markets at record highs.
  3. Mar 2021: UNI reached the peak at $42.88 with UNI V3 mainnet launch; SUSHI reached the peak at $16.26 and revealed LP token reward distribution; ETH soared above $4,000 for the first time.
  4. May – Jul 2021: Projection across wall street that inflation’d increase 5% Year-over-year, dragging crypto and global markets down.
  5. Jul – Sep 2021:Crypto market rebounded til early September, triggered by the implementation of ETH London Hard Fork and better inflation performance than expected. In September 2021, UNI and SUSHI reached the max price to date at $31.05 and $15.18 respectively, without following the rise of ETH in November 2021. (note: ETH reached its historical peak at $4815 in November 2021.)
  6. Nov 2021: The overall crypto market has been experiencing a downfall since November 2021.
  7. June 2022: Uniswap Labs announced the acquisition of Genie, the first marketplace aggregator.

12/ Conclusion

Despite the gloomy macro environment and bear market clouds, Uniswap continues facilitating countless trades to demonstrate that UNI is a blue-chip asset for early adopters. Going forward, it is debatable whether blue-chip assets such as UNI or which other rising altcoins will lead the next bull market. Nevertheless, with an investment arm and an NFT marketplace aggregator on board, we believe Uniswap is well-positioned to seed its position as a foundation of the crypto economy.

Disclaimer: This material has been shared solely for information purposes, and must not be relied upon for the purpose of entering into any    transaction nor investment. Newman Capital is not an investment adviser, and is not purporting to provide you with investment, legal or tax    advice. You are always advised to DO YOUR OWN RESEARCH before making any investment decision. Newman Capital has a position in  UNI token.

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