Monitoring the dynamics of liquidity providers on Uniswap

‍Our analysis reveals that over 90% of the largest liquidity providers don't maintain their dominant positions for more than a month.‍

We suspect that this is due to the reallocation of liquidity among different positions and swaps. This rapid turnover shows a dynamic market in which liquidity providers are constantly adjusting their strategies. The frequent reallocation of liquidity across different positions and swaps suggests that liquidity providers are quick to respond to market conditions, seeking optimal returns in a constantly evolving environment.

Despite the volatility in LP rankings, month after month, the top three liquidity providers consistently account for 95% of inflows. This concentration of power has remained stable nearly every month, with only a few exceptions over the past year. Such dominance implies that a handful of institutional players or projects wield considerable influence over the liquidity environment - which could hint to a system risk.

While this concentration can provide stability and depth to the market, resilience could be tested if these key players were to face unexpected difficulties or decide to withdraw their liquidity.

A closer look at the WETH/USDC swap market over the last three years reveals Symbolic Capital Partners as a consistently succeeding player. Its position as the dominant liquidity provider demonstrates a high degree of confidence in the market and also a strong influence on trading conditions and pricing.

Methodology and assumptions behind the numbers

To track liquidity in Uniswap V3, focus on the mint call function and increaseLiquidity event within the NonfungiblePositionManager contract. This approach allows for assessing monthly liquidity contributions accurately. For a deeper dive into the technical aspects, refer to the Uniswap V3 documentation.

The analysis rests on several key assumptions:

The recipient of the mint call function is considered the liquidity provider for subsequent increaseLiquidity events. By leveraging increaseLiquidity event logs, the precision of liquidity contribution tracking has been enhanced.  Data presentation has been streamlined by focusing on the top five liquidity providers and grouping the rest under "other-combined."

Most positions remain with their original providers, as evidenced by the fact that less than 2% of NFT-wrapped positions for WETH/USDC swaps have changed hands. This stability in ownership is explained in detail in Uniswap's documentation on liquidity position ownership.

The current method focuses solely on liquidity increases, not accounting for decreases which could provide another view of available liquidity.

By staying informed about LP behaviors and market structures, participants can make more informed decisions, contributing to a more efficient and resilient DeFi system. Sign up for Allium access at https://www.allium.so/contact or reach out to me (hello@allium.so) to learn more!