State of Uniswap Q4 2021

If you would like to view the raw data and charts that were used in the writing of this article, check out our Uniswap Macro Financial Statements dashboard on Dune Analytics.

Key Takeaways

• Uniswap hit an all-time high transaction volume in Q4 2021 behind $238.4bn worth of trades, more than 61% above the previous quarter.
• The launch of V3 on Arbitrum and Polygon helped kickstart new liquidity pairs, resulting in the total number of markets increasing by 17%.
• The governance decision to enable a 0.01% fee tier helped drive stablecoin trading activity. Transaction volume between USDC/USDT increased more than 100% in Q4.
• A frothy trading market in Q4 benefitted Uniswap’s liquidity providers, who earned 54% more in fees than in Q3.

Introduction to Uniswap

Uniswap facilitates the trading of tokens on the Ethereum network along with scaling solutions such as Optimism, Arbitrum, and Polygon. The protocol is recognized as a pioneer among decentralized exchanges (DEXs), particularly for its popularization of the X*Y=K model of pooled liquidity. This model represents the initial driver of Uniswap’s automated market making (AMM) operation and has since been implemented across many other DEXs in the industry.

To quickly recap, AMMs pair tokens into pools balanced by the aforementioned algorithm. Liquidity providers (LPs) can contribute funds into those liquidity pools where traders can make trades by swapping tokens in and out – in effect, making trades with the pool. In exchange for providing liquidity, LPs earn trading fees paid by traders transacting with each liquidity pool.

Important updates to the protocol in the past year include the launch of V3 – notable for its revamp of the market-making module, which provides LPs with the ability to concentrate liquidity in specific price ranges, and new support for Ethereum scaling solutions, including Optimism in July, Arbitrum in September, and Polygon in December. Both changes and their respective effects will be covered further below. (Note: Optimism underwent its Regenesis upgrade in November and removed all prior transaction history. For the contents of the report, all Optimism activity tracked in the data occurs post-upgrade.)

This report will review Uniswap’s key metrics for Q4 2021. As it also marks the end of a volatile trading year, metrics will be benchmarked against previous quarters and the rest of 2021. A full appendix of quarterly data is available at the end of the report.

Macro Overview

Uniswap’s trading volume increased from $57.8bn in 2020 (when Uniswap first began facilitating trades in May 2020) to $681.1bn in 2021. A total of $91.8bn worth of trades occurred in Q1 while the protocol ended Q4 with $238.4bn of trading volume, marking a 160% increase. Growth did not occur steadily, however, as trading volume from Q2 to Q3 declined 13% before jumping 61% to finish the year.

Unsurprisingly, periods of high volatility in May and December led to the largest daily transaction volume. December 4, 2021 was the second highest day of the year with $5.8bn volume occurring across all Uniswap markets.

V3 transaction volume rose quickly and overtook V2 volume within the first month of going live. In Q2, the quarter in which it launched, V3 generated $58.9bn worth of trades. Comparatively, Q4 had $180bn worth of trades, or a 205% increase.

While liquidity between V2 and V3 isn’t a direct comparison due to higher capital efficiencies in the latter, it’s still worth studying total reserve numbers behind both markets. Over the last half year, V3 slowly built up its liquidity, eventually hitting the point where total liquidity in V3 overtook V2. A chronological review shows a month after its launch, the total USD equivalent of all token reserves in V3 was 50% of V2. By the end of Q3, that number reached 66%. With the introduction of V3 on Arbitrum, Optimism, and Polygon, the V3-to-V2 ratio now exceeds 100%. Over time, one would expect this ratio to continue to grow as the Layer-2 ecosystem expands further and V2 pools are replaced with concentrated V3 versions.

Daily fees earned by LPs in V3 markets overtook V2 markets on May 24, 2021 — and though a few days in the rest of the year did see V2 markets earning higher single day fees than V3 markets, the general trend was more revenue earned by the latter. In fact, liquidity providers in the Q4 time period generated 183% more cumulative revenue from V3 than V2, attributable to the higher transaction volume negating the result of lower fees-per-trade from lower fee tiers.

Uniswap began the year with 27,545 total markets on V2, a significant jump from July 2020 when it only had 1,681. While 2021 did not see quite the same leap in percentage gains, total markets rose by a larger amount on a nominal basis. On December 31, 2021, Uniswap ended the year with 67,231 trading markets, up 17% from the previous quarter and 144% on the year. Naturally, Uniswap benefited heavily from crypto’s breakthrough to retail investors. The influx of interest led to a significantly larger number of new projects. Corresponding project tokens required marketplaces for trading, which became an attractive opportunity for Uniswap and other DEXs.

Micro Overview

Differences in Q4 trading activity across Uniswap’s various platforms can best be summarized as an increase in memecoin interest within V2 markets and more traditional blue-chip token trading driving volume in V3 markets.

Top V2 Markets

Three of the top four markets by trading volume are analyzed further below. The selected exclusion from the four is the USDT/WETH market which closely mirrors the activity in the USDC/WETH market.

The number of accounts providing liquidity to Uniswap pools followed broader user activity for most of 2021, particularly in the second half. One notable exception occurred around mid-May when the number of new liquidity provider accounts plummeted to nearly the lowest point of the year. The second half of the year for this metric was, on average, lower than the first half as the shift to V3 broke the LP regards model and LPs took their capital to other Layer-1 protocols and/or competing DEXs.

USDC / WETH

As mentioned prior, the USDC/WETH market was the most active Uniswap V2 liquidity pool in Q4. Roughly $3.5bn of value was transacted between traders and liquidity providers during this period, an increase of 59% from the previous quarter. Perhaps the most notable takeaway is the drop in volume compared to previous quarters for the same liquidity pool, but it’s worth remembering the launch of V3 pulled liquidity from the V2 pool into the concentrated V3 pools. In total, $29.1bn worth of trades occurred within this pool throughout the year exclusively through V2.

SAITAMA / WETH

The remaining two V2 markets are best categorized as token pairs popular during the bull market. The first is SAITAMA (or SAITAMA INU), the native project token for the Saitama community.

SAITAMA / WETH did not see much trading activity until October 2021. Thus, SAITAMA / WETH would not have seen high volume in any other quarter, a statistic confirmed by the jump to $2.3bn in volume from $0.2bn in Q3.

October 2021 was when liquidity provider fees began to surge with a gradual tapering starting in December. However, the annualized daily APR liquidity providers received during parts of the summer almost reached 600%. The combination of low volume and high APR means the total count of liquidity providers was not high, likely affirming the notion SAITAMA did not have much prior recognition by crypto investors until late-summer.

ELON / WETH

It should be easy to tell why Dogelon Mars (ELON) token generated investor interest in Q4. A combination of the Dogecoin meme, fandom for Elon Musk, and a common desire for Mars-high valuations in the project name certainly appealed to a subset of speculative investors. Unlike the market for SAITAMA / WETH, ELON jumped at two separate points during the year: mid-May and early-November. Not much activity happened in between when the overall crypto market fell into a lull.

Not surprisingly, liquidity provider yields were volatile and offered high returns when retail interest in ELON came alive. Annualized daily APRs peaked at almost 450% though the same metric generally fell under 10% for most of the year. Similar to SAITAMA, there was relatively low liquidity during the period from May to October. ELON / WETH hovered roughly around $6M in combined deposits, though this number did pick up in Q4. Regardless, it’s a far cry from the $200mm or so worth of token reserves in the USDC / WETH market above.

Top V3 Markets

In May, Uniswap released V3 of its DEX, which introduced the concept of fee tiers in each market. The idea behind the tiers was to increase capital efficiency by separating different markets by their volatility. More volatile markets would charge a higher trading fee while pairs that move more closely together would charge a lower fee. Three tiers were created at the time of V3’s launch: 0.05%, 0.30%, and 1.00%. In Q4, Uniswap governance passed a fourth 0.01% fee tier designed to tackle stablecoin trades and compete with specialized AMMs such as Curve Finance.

In sum, 12% more users made a trade through V3 in Q4 than in Q3. Segmenting the data further highlights higher volatility in the number of users trading in the 1.00% market compared to the others. This is particularly noticeable in May and December, which as stated previously, were two periods in the year where market volatility was high. Due to rapid demand in low cap coins, the 1% fee tier saw significant volatility spikes as traders chased price movements. With 1% fee tiers usually reserved for non-blue chip tokens, liquidity in these pools can earn significant returns as demand rapidly shifts from little to much in short periods of time.

USDC / WETH

Trading volume in the USDC/WETH market grew 59% over Q4. Liquidity, meanwhile, grew 80% and liquidity provider fees grew 19%.

In the V3 USDC/WETH market, what’s most interesting is the decline of trading volume in the 0.30% tier and the growth in the 0.05% tier.

This trend reflects how competitive exchanges are. Capital competes with capital for fees – in order to undercut each other, jumping to the lower fee tier and concentrating liquidity is a frequent strategy in the hope of attracting trading volume a LP wouldn’t have gotten in a higher tier. It would stand to reason that trading volume moving to lower fee tiers would occur across other markets as well, which does also occur in the WBTC/WETH market below. This trend will be interesting to watch over the next year.

USDC / USDT

Trading volume in the USDC/USDT market grew 114% after declining 30% from Q2 to Q3. Meanwhile, liquidity increased 53% while liquidity provider fees declined 13%. One explanation for the increase in liquidity could be increased volatility and bear market fears, driving investors to move more of their capital into stablecoins.

Stablecoin markets also heavily benefited from Uniswap’s creation of the new 0.01% fee tier. Trading of stablecoins in Q4 increased significantly from the previous quarter, though it’s unclear how much of that was due to the new fee tier compared to increased volatility in the quarter. Immediately after the launch of the new tier, the volume in the USDC/USDT market increased significantly and volume in the lower tier now routinely represents multiples of the volume in the higher tier, though daily LP fees are not significantly higher than before.

WBTC / WETH

Overall trading volume in the WBTC/WETH market grew 54% from the previous quarter. Meanwhile liquidity grew 36% and liquidity provider fees increased 38%.

The takeaway from the WBTC/WETH market is similar to the USDC/WETH market above, namely the competitiveness of exchanges driving volume away from higher fee tiers in favor of lower tiers. Though most trading volume occurred in the 0.30% tier in the first few weeks post-V3 launch, significantly more volume is now occurring in the 0.05% today. WBTC/WETH does appear to fluctuate at times between the two in a manner which USDC/WETH does not.

Market action between 0.05% and 0.30% did increase in Q4 compared to Q3. Whereas a consistent 70 - 80% of trading activity took place in 0.05%, trades in Q4 were routed to the higher tier during those days where there was higher volatility.

Grant Program

The Uniswap Grant Program (UGP) batches grant funding in waves, which are not correlated with any specific quarter or predisposed length of time. The data for five waves dating back to March 2021 are publicly available while a sixth wave is already completed and not yet released. UGP is currently on its seventh wave of grants. Note that several grants funded in Wave 5 occurred in Q3 2021.

Almost 50% of Wave 5’s funding was earmarked for sponsorships. An additional ~20% was spent towards community-oriented and tooling-oriented projects. The remaining capital went towards usability and governance grants. Governance was a new category in Wave 5. This was also the first wave that did not have any grant money for Request for Proposals and Challenges. Some of the largest grants from Wave 5 include for the following initiatives:

Ethereum Execution Layer Support – $250,000

UGP, alongside equivalent donations from Compound Grants, Lido, Synthetix, The Graph, and Kraken, contributed $250K to further the continued development of Ethereum execution-layer client teams. The $1.5M was raised to supplement existing funding provided by the Ethereum Foundation. Besu, Erigon, Geth, Nethermind, and Nimbus were the five selected recipients of the funding round.

DeFi Alliance – $150,000

DeFi Alliance is a DeFi and Web3 accelerator backing entrepreneurs building projects in the crypto ecosystem. Protocols who came out of the program include dYdX, SushiSwap, OlympusDAO, Synthetix, and many others. In support of the accelerator, UGP contributed $150K to help fund a cohort of ambitious startups.

Valve Finance – $100,000

A $100K contribution was made to Valve Finance to develop optimization algorithms for the routing of large orders during times of insufficient liquidity. The goal of the grant is to formulate multi-path trading strategies from Token A to Token B, thus providing traders better pricing for their transactions. Additional features such as advanced real-time data and simulation tools would also be explored as part of the grant.

Messari – $60,000

Messari is a research and data analytics firm. The grant allocated to Messari integrates Uniswap into the research portal. Messari will also publish four research reports, such as this quarterly report and another on the rollout of V3 on Optimism, for the Uniswap community and Messari’s institutional client base.

Governance Updates

December 21, 2021 – Provide Voltz with Uniswap V3 Additional Use Grant

Voltz Protocol requested a use grant of the code base from V3 within its interest rate swaps AMM in exchange for 1% of its token supply. Under the guidelines of the Business Source License, which allows for the temporary limited production use of software with the future agreement to become open source, Voltz would not be permitted to portions of the V3 code unless approved by the Uniswap community.

December 3, 2021 – Incentivize Liquidity on Optimism and Arbitrum

A consensus check was passed intended to gauge community interest in incentivizing liquidity to kickstart increased activity on Optimism and Arbitrum. As a leading player in DeFi, Uniswap has the ability to help bootstrap usage in Layer-2 protocols through its large treasury. The proposal is still in discussion with the community and interest in being gauged.

December 2, 2021 – Deploy Uniswap V3 to Polygon

On December 2, the community officially passed a consensus check to authorize Uniswap Labs to deploy the Uniswap V3 protocol onto the Polygon network. As part of the proposal, the Polygon team was willing to commit up to $15M for liquidity mining purposes and up to $5M for general development of Uniswap on Polygon, as well as other qualitative support such as design around liquidity mining programs, promotion of the Uniswap protocol, and more. The proposal was executed via on-chain vote on December 23.

November 2, 2021 – Add One Basis Point Fee Tier

The proposal to add a new one basis point fee tier was designed for Uniswap to better compete in the stablecoin markets dominated by protocols such as Curve. 100% of the vote was for this proposal and the proposal was executed on November 12.

Final Thoughts

The Fed’s decision to raise interest rates reverberated across all markets. Crypto was among the industries which took a hit. Yet as an exchange, Uniswap was actually a beneficiary of the macro environment. Combined with strong retail interest in the first half of the quarter, Uniswap helped facilitate higher transaction volumes in Q4 and liquidity providers earned higher fees during that time.

Looking ahead, Uniswap’s decision to engage with Layer-2 scaling protocols could be a catalyst for continued growth. The addition of a new fee tier for stablecoin trading also allows it to be more competitive across the DEX landscape. Both of these changes are relatively early, so there’s reason to be optimistic moving into the new year.

Appendix

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