Total Volume + Fees
It's a good day to be an LP on Arbitrum.
Arbitrum L2 has etched its name in DeFi history since it became the first L2 to eclipse ETH L1 in volume on the 4th of January while also becoming the first L2 to achieve over $1 billion in volume on Uniswap.
Being an LP on an Arb Dex is great. That is unless you were affected by the Gamma Strategies (Arb based) hack which lost roughly $6 million of LP deposits. And this isn't even the biggest hack of 2024. One day before this Radiant Capital Hack lost $4.5 million and Orbit Bridge got hacked for a staggering $81.5 million.
Furthermore, the crypto markets are in grips of BTC ETF rumors.
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This week on the docket:
Why Arbitrum is ripe for LPs
Gamma Strategies Hack
Dynamic fee paper by atiselsts.eth
Arbitrum leads the L2 Market Share
Arbitrum's airdrop might have sparked initial interest, but its impressive near 50% market share in Eth L2s is a testament to its sustained, independent growth. This week we saw Arb take over Eth L1 as the most used chain. L2 volume overtaking L1 Eth was anticipated for a long time but was still a moment of triumph and vindication, marking a pivotal chapter in the scaling saga of Ethereum.
While Uniswap holds a prominent position on Arbitrum, GMX ($227.57M pool size) has emerged as an alternative raking in nearly $340,322 in fees in the last 24 hours. GMX allows for leveraged trades and has been a popular choice for traders, while LPs make money from from providing liquidity, swap fees and also from liquidations and funding the leveraged trades.
Camelot is also a popular DEX choice, becoming one of the most popular exchanges on ARB.
LPs seem to be gravitating towards ARB, with nearly 3000 positions opened in the last 24 hours. Apart from stable pairs and Arb pairs, consumer apps are also rising on Arb with XPET, BPET(fren.pet clones) with a 24 hour volume of $5.69 million. XPET and BPET achieved nearly 53,000 thousands trades with nearly $200,000 generated in fees
Meme tokens also present ample opportunities for LPs, with NOLA and SMOL pairs among the most popular pools on Arbitrum.
With low median transaction fees of around 30 cents, Arbitrum offers an on-ramp for new liquidity providers just discovering DeFi.
Some LP pools on Arbitrum that you can discover right from the Poolfish tool are:
Pendle Finance lets you trade future yields
Check out some other pools on Arb here
Gamma Strategies Hack
Gamma Strategies is DEX based on Arbitrum, recently got exploited for nearly $6M million on the 4th of Jan. The attack vector was a vulnerability that was identified in vaults that allow users to trigger deposits while using liquidity ranges based on the current price of assets.
By manipulating liquidity, triggering a deposit, and swapping at inflated prices, the attacker siphoned reserves from the vault.
Consequently Gamma Strategies' Volume fell by more than 50%
In response to the $6 million exploit, Gamma has committed to fully reimbursing the 253 affected accounts. They are also attempting to engage the hacker to potentially recover some portion of the stolen funds.
Gamma's handling of the incident has been professional - with a transparent claims process for victims to dispute losses if needed. And the team seems focused on enhancing the protocol's security to prevent future attacks.
Dynamic Fee Study
Toxic flow are LVR/arbitrage trades which ends up hurting LPs by causing sudden price swings against DEX pools. This increases impermanent loss for LPs and eats at LP profits.
Their core goal was to improve LP profits by correctly pricing volatility risk in pools with fixed fees like in Uniswap V3
The study analyzes metrics like depth and volatility to showcase scenarios where preset fixed fees underperform, and evaluates different types of dynamic fee approaches in addressing these issues which are ultimately a "lose/lose for DeFi."
Some techniques to study a dynamic fee was:
Volatility-based - Tie fees to historical volatility data
Lookback method - Set fees based on profitability of external pools over lookback period
Price oracle - Increase fees if trades diverge from oracle price
Price momentum - If recent pricing already moved in a direction, charge more to trade further in that direction
A dynamic fee hook has been one of the most anticipated feature in the upcoming Uniswap V4. And this study proves that LP profits can be increased and LVR hunters can be discouraged.
They also do however, acknowledge that implementing a dynamic fee could also hurt LPs especially if they implement a fee based on historical data. Their findings also suggest that lower fee tiers for volatile assets may not be desirable with especially toxic flow. It's important to note that this study was based on volatile pairs and stable pairs. Stable pairs might fair much better with dynamic fees.
It seems we will only figure out well dynamic fee structures perform against fixed fees when Uniswap V4 launches.
Top Pools of the Week (On Uniswap ETH)
USDC/ETH in the 5bps category for the cautious paddlers.
While Arbitrum has the lead on Uniswap, lots of L2s are seeing action. For novice LPs, this boom presents an easier on-ramp and with Uniswap V4 on the horizon, the possibilities seem endless.
L2s are gearing up in this bull cycle and are being widely adopted. If you want to search for profitable pools, Poolfish Pools explorer has all major L2s listed.
Till next week. Happy LPing!
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