⁉️The DEX Dilemma

Problem Statement of a DEX

When considering decentralized exchanges and evaluating their performance indicators, people almost universally think of:

  • TVL

  • Volume

In that order.

The Potential Misleading Nature of TVL:

Liquidity may remain relatively inactive. Numerous Automated Market Maker (AMM) pools exist with dozens or even hundreds of millions in TVL, yet they might only experience average daily trading volumes of several hundred thousand dollars or even less, sometimes creating less than $100 in daily fees despite substantial capital commitment.

The Potential Misleading Nature of Volume:

Volume does not inherently signify value creation as fees may be minimal (or zero), or volume could be influenced by wash trading.

Optimal Indicator for DEX Performance:

The most reliable indicator is 'Fees'. This metric illustrates what users are willing to pay to utilize the platform and is resistant to manipulation due to its cost-prohibitive nature. It remains a genuine indicator since predominant focus typically lies on TVL and Volume, which are more susceptible to gaming.

Case Study to Demonstrate TVL Efficiency:

Data from Dune Analytics reveals that in a 7-day period in October 2022, Uniswap generated $4.51M in fees, of which the top 30 pairs contributed $3.56M or 79.03%. Those top pairs only account for $1.11B or 31.31% of its total TVL, indicating that the other $2.44B (or 68.68% of TVL) are mostly underutilized. This underscores that TVL can exhibit varying degrees of efficiency.

Decentralized exchanges today don't manage to effectively bring together all of its parts into a symbiotic relationship to create the maximum amount value for its stakeholders


  • UNI holders receive 0% fees, while incentivizing liquidity and experiencing dilution

  • xSUSHI does not earn any fees as of late, while incentivizing liquidity and getting diluted

  • veCRV holders receive 50% of protocol fees, some from pools they're not voting for, enabling inefficient allocations of protocol incentives

  • No existing DEX provides dilution protection

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