Uniswap, one of the most popular decentralized exchanges (DEX) has seen its liquidity plummet by almost 40% within 24 hours since its incentives for four of its main asset swap pools has ended. Three out of the four pairs are ‘stablecoin’/Ethereum swaps such as USDC, DAI and USDT, and they have all stopped giving stakers UNI rewards as of November 17th. Since its launch on the 1st of September this year, Uniswap allocated about 1.25 million UNI tokens to each of these pools as a way of incentivizing stablecoin holders to lock up their tokens in the pools. This, by all accounts, has worked tremendously well as UniSwap’s Total Value Locked (TVL) posted an all-time high of $3.07 Billion. Yes, that is billion with a capital B. As of writing, that number has already dropped to about $1.36 Billion, and by all accounts will fall even further.
The question though, is how this affects stablecoins at large?
As we have covered in previous articles before, stablecoins have blossomed in 2020 to insane market caps and trading volume, many thanks to swapping pools like the ones provided by Uniswap. Users stake their USDT (or other stablecoins) in the pool, and rake weekly incentives issued by the project. While this won’t necessarily turn everyone into a millionaire, it does offer the stakers essentially “free” money while locking their assets — and more importantly provides Uniswap the liquidity it needs to grow its platform and value of its token. This form of flash farming is one of the key challenges facing the entire stablecoin industry.
Sure, on the one hand — stablecoins provide a stable value independent of market fluctuations. But on the other hand, their actual value is primarily still used as a tool for other projects, rather than being the main beneficiary of the success from these projects. The main benefactors of Uniswap’s high TVL are the people who hold UNI tokens, or the people behind the project — rather than the users who farm UNI using their stablecoins. So once the farming event ends, as it has on the 17th of November for the 4 Uniswap pools, stablecoin holders are left to wonder what to do next with their assets.
They could pull their assets out of Uniswap and look for an alternative, as rival SushiSwap has already altered its menu of the day to reflect the exodus of swaps on UNI. But they could also simply wait a little longer, as Uniswap’s community has already submitted a proposal to re-create incentives for these pools so it doesn’t continue to lose liquidity. Ultimately, liquidity is proportional to the price of the UNI token — so as money flows out of its TVL, so too does the price of UNI plummet.
For the farmers who staked stablecoins in order to receive UNI as incentives, another question pertains to this situation. What should they do with the UNI tokens already received? Do they dump them, at a lower price since the money is flooding out of Uniswap’s TVL? Or do they sell them off into more consistent performing assets like ETH or an array of stablecoins? Either way, users will have to find some use for these UNI tokens — something hard to do as liquidity keeps draining at the rate it is now.