Diesel Pools are generating money for liquidity providers and saving money for traders
Hey folks, so on 1/27/22 we instituted a small 0.25% trading fee for all transactions in the diesel pools. This has resulted in fees piling up in the pools for liquidity providers.
Fees to date
2022-01-27 => $1898.96111
2022-01-28 => $1458.43986
2022-01-29 => $1203.85103
2022-01-30 => $1264.00858
2022-01-31 => $930.01349 (not complete)
Fees are going down as prices are going down and volume is dropping a little. I imagine it's part of macro cycles where trading volume comes and goes. So, at this point I think we're looking at low end values of how much people can earn. That said, it's only been 4 days so I'm not going to defend this first reaction to the death. As the market picks back up and prices go higher and btc stops trading under 40k I think we'll see a substantially higher volume at higher prices which will make money-made-number go up. But again, it's crypto and my crystal ball isn't precise.
Anyway, we're working on a whole lot more tracking at Hive-Engine. The first part is a tax reporting software, but it has other analytical help it can offer too. We haven't spoken about the tax project much, but it's been in development for about a month trying to help people prepare for taxes in April.
In this case we're using data from the tax project to figure out the % return by the pool owners.
We have 4 full days so I'm going to add those up- $5825.
Then I'm gonna turn those 4 days of results into an annual estimate- $531,531
Then I'm gonna say that the top 3 pools contribute about 80% of the volume. So, I'm gonna shrink the value by 20%. $425,225.
At today's rather low value for BTC, low volume for trading, and low price point for the altcoins the people staking in the top 3 pools will earn roughly $425,225.
What does that mean for a return?
Well, if we look at the top three pools-
You can see the total liquidity in them-
$827,676, $423,934, and $2,348,452- It's almost exactly 3.6M USD.
So, if we earn $425k on a $3.6M pool we get 11.8%.
So, you're telling me what?
At the lowest level you can think of Liquidity pools like a savings account. In that savings account you can earn a return kinda like at a bank. In the bank your return is probably 0.25% per year. Parking money in a diesel pool right now can net you something like 11.8% return if it stays at the current pace.
But there's a couple of caveats.
The rate of return fluctuates every day. So, there isn't just 1 rate. It's more like a rate per day and your annual amount is based on the sum of that daily return. It's my hope that BTC is bottoming out and we're going to see a lot more activity soon. If that happens I expect the numbers go up substantially for the volume of tokens, the USD volume and thus the amount earned in trading fees. If that doesn't happen we may see volume and prices decline still. Crypto is volatile and a big down turn is the main risk (especially if you sell).
You also want to think of the fact that what you're storing doesn't have a stable value typically. First off, if you're storing value in dollar backed anything the dollar seems to be losing more and more value as they print absurd amounts of it and people lose faith in it. So, holding in dollars could be a good move in the super short term, but is likely to get inflated away long term.
The last thing to think about is that the real time to measure your absolute returns is when you're pulling money out. The crypto you have parked there will continue to earn more tokens on both sides of the pool by just sitting there passively growing in an account. The moment of truth is what price are you pulling it out at and selling for something.
Did the dollar value of the token price increase or decrease? Up until that point it's like tracking theoretical returns since you're not cashing your chips out. You sit back and let this thing generate fees for you in various crypto currencies. You don't touch it until the market is what you consider high, and then you take the money out. When you do that, you'll get what I'd consider the actual return on your investment. Same is true if you're forced to sell at a low price due to unforeseen circumstances or lettuce hands.
The way to actually measure success is figure out how much money you made by subtracting the number of tokens and their price when you put them in versus the number of tokens and their price when you took them out.
Let's say you park $10k in the DEC:SPS pool right now. DEC is trading at 0.003. SPS is trading at 0.11506. Let's say amazingly the price stays the exact same for 2 months. During that time you make your 11.8% annual return. So, now your account is closer to $10,200. That's not nothing, but you're probably not changing your life over it. Then finally, the price of these assets move substantially up. Dec doubles to go back to 0.006 and SPS goes on a tear to 68 cents again. At that point your DEC would be something like double the price and now worth $10000+ and your SPS would be be worth like 6x or $30k. LPs are funky and this is a very broad generalization, but at those prices you'd see something like a 4X overall return.
In this case most of your benefit comes from the increase in price, but you're earning along the way. So, when the time comes to pull out you are ahead on amount of tokens and also USD value of tokens. If you have to sell in a down turn hopefully the extra tokens you earned for trading fees keep you in the black.
BUT WAIT! THERE'S MORE!
in particular consider DEC:SPS. In that pool there's a couple of reward types. You're getting airdrop SPS rewards and also BEE rewards. So, how much return you're actually getting requires calculating a couple different income sources.
Those are a little out of the scope of this morning's activity. Overall, I'm trying to help you guys understand that parking cash in liquidity pools has some risks, but can add a ton of value.
What about traders?
Normally you'd think "Hey, these dicks are adding fees! That's gonna make my cost go up!" and in most places that's probably right, but in crypto things are weird so you get unexpected consequences left and right.
So, here I want to trade 10k hive for SPS. If I do this you can see down at the bottom in green that this will have a 4.63% price impact. What that means is that because this trade represents a sizable portion of the overall liquidity pool the USD value of money I receive on the trade is going to get hit by 4.63%. Now, if the size of the liquidity pool goes up then the price impact will go down. There's only $400k or so in that liquidity pool. So, if the size of the pool increases a lot then that transaction will represent less of it, and price impact can go down. There's more room to go down than just 0.25%, so there's a big opportunity here for us to drive value to traders by increasing the size of liquidity pools.
So, yes, a fee got added, but if this goes right the amount of liquidity on the exchange increases by holders looking to make a 12% return (at the slow times) for holding assets they like anyway in diesel pools, and if the amount of liquidity is higher the price impact is lower. If it's all going according to plan the price impact for your trade is reduced by more than 0.25% to make up for the fee so it's a win-win for the trader and liquidity provider.
TL;DR - My general plan
Stake my tokens
leave them there to appreciate in token number until they hit prices I like
cash them out
Low end try to get 12% APR just from fees
High end get more by token price go up and other rewards for staking that are provided
Relax math nerds
Anyway, this isn't meant to be financial advice, and it's not even all calculated exactly accurately because liquidity pools are stupid hard to model accurately. So, don't go ape into an LP without any experience, get burned and blame me. Like anything else in crypto, I suggest keeping your moves small until you have experience and understand what you're getting into. Once you have a feel for things then ape in and try not to get rekt.
The benefits appear to me as
- the ability to earn crypto passively
- the ease of use
- the potential of coins to moon
- the multiple revenue streams that are possible
- price impact fees should reduce beyond a 0.25% trading fee as more LPs stake crypto on the platform
the downsides appear to me as
- the potential of coins to increase in number but still decrease in USD value
- asymmetric price movement can leave you with less tokens than you started with because pools can be weird (so, if you really want to make sure you never go below 32 eth so you can stake for eth 2.0 in 2045 then pools won't always provide that certainty of number of tokens on hand)