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Uniswap Liquidity Drops Below 50%

Customer loyalty is a myth in the decentralized finance (DeFi), at least in current times.

As liquidity incentives ended on decentralized exchange protocol Uniswap, the platform saw an exodus of Ethereum and other tokens to rivals like Sushiswap and others, data from multiple sources showed.

The cause

For the uninitiated, Uniswap is a type of automated market maker that pools funds from users for different trade pairings — such as ETH/USDT or UNI/ETH — and automatically matches trades. In return, it pays all pool contributors a fraction of trading fees generated on the platform, giving them an incentive to continue to pool their funds (and able to stake liquidity tokens on other DeFi apps for yields).

As a result, the pools are massively influenced by whichever pools are generating the highest yields for users. This means a majority of the userbase is more profit-seeking than loyal to a particular DEX — creating a scenario where protocols giving the highest yields temporarily attract the highest funds, but lose users quickly once those yields dry out.

And Uniswap was no exception to this. Liquidity provided by Uniswap users fell by almost 50% as of November 19. It was north of $3 billion on Monday but fell to $1.3 billion on Thursday at press time — suggesting incentives were a big part of Uniswap’s allure (ahead of its brand or other factors).

Data on the tracking website DeFi Pulse shows the characteristic “rug pull” formation for Uniswap’s liquidity data. Its total value locked (TVL) grew steadily over the past year to a high of $3 billion this year, but since dropped off a cliff to levels seen in early September.

Image: DeFi Pulse

The winners, however, from Uniswap’s incentive-ending move were other DEXs, such as 1inch, Bancor, and Sushiswap (a fork of Uniswap).

The effect

Bancor unveiled a liquidity mining program that included retroactive rewards on November 17. Its TVL went up almost 50% on Wednesday, with more than 125,000 ETH locked up on the platform. Meanwhile, 1inch introduced its own rewards program, awarding 1% of its token supply to liquidity providers.

However, Sushiswap appears to have attracted the largest amount from Uniswap. The project, which saw controversy earlier this year as its anonymous founder left the platform, introduced new farming rewards and yields to existing pools.

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