With MCCN’s return on the horizon, it’s time to start diving into the data again and see what we can uncover! In this article I will be doing a deep dive into the fee revenues on Thorchain, and see how its unique slip-based model is playing out in practice.
Two key trends stand out in the data. First, BEP2 pools are the best performing on all of Thorchain, and perform significantly better than ETH and ERC-20 pools. Secondly, market crashes are a highly profitable time to be a Thorchain LP. Not only does trading volume increase significantly, but traders’ tolerance to pay slip fees increases when they are highly fearful.
Overview of Fee Revenues:
A total of 237,868.51 Rune has been paid out in fees between launch of MCCN and the first system halt (data gets a bit weird after the hacks, so I will focus on earlier data for this analysis). In figure 1 we can see the breakdown of fees earned by each pool. BUSD is the clear winner, generating 56,788 Rune, despite being only the 4th largest pool by depth. The other stable coin pools USDC and USDT also perform well, generating the 3rd and 6th most fees respectively. Unsurprisingly, BTC and ETH also generate a lot of fees, although a lot less than you might expect. BTC and ETH together make up 37% of all liquidity on the platform, (45% before XRUNE), but just 28% of fees earned.
BUSD performs so strongly for two reasons. Firstly, demand for stable coins has been very high in the recent market crashes, which drives volume to the pool, and hence more fee revenue. Secondly, BEP2 pools have low fees, so have more arbitrage opportunities. This means more volume traded, and again more fees earned. More generally, all BEP2 Pools perform excellently relative to their size.
BEP2 Pools are the Best Performing Pools on Thorchain:
As I discussed in a recent twitter thread, BEP2 pools are the best performing pools on all of Thorchain, and generate significantly more fees than their ERC-20 counterparts.
ERC-20s account for 35% of all liquidity, but just 28% of fee revenue. Meanwhile, BEP2s account for 25% of liquidity, but over 40% of fees earned. Lower fees means it is easier for arbitragers to find profitable swaps, which drives volume and hence fee revenue. Volume on BEP2 is an astonishing 6x higher than ERC-20, at 63 million Rune vs 10 million Rune since launch.
This leads to a couple of interesting hypotheses for Thorchain LPs to think about. First, if Ethereum 2.0 ever actually comes out, and we see a reduction in gas fees, this should be massively profitable for Thorchain. The increased arbitrage opportunities would likely provide a significant boost to revenue.
Second, the most profitable pools Thorchain users should support to be added to the platform are those with low fees. BEP2 USDT for example could be a great replacement for USDT after the recent ERC-20 exploits. The boost in fee revenue from arbitrage would likely results in a higher APY for LPs, despite lower demand for the BEB2 version of USDT. Similarly, tokens in the Cosmos ecosystem for example, such as ATOM, would likely be highly profitable for LPs, since they have very low fees.
Market crashes are a great time to be a Thorchain LP:
Plotting Rune price against the daily fees earned from all pools since launch of MCCN, we can see large spikes in earnings on days 45, 65 and 74, paired with significant drops in Rune price. Large Rune price crashes correspond with some of the highest earnings in any single day for Thorchain LPs. Combining this data with the plots of fee revenues from the stable coin pools, it is clear where a large part these increases in earnings come from.
Here we have the daily fees earned by each of the stable coin pools. The peaks in fee revenue correspond exactly with the peaks on days 45, 65 and 74 from figure 2. This is because in market crashes, traders flood to stable coin pools to try and protect their portfolio.
This pattern in fee earnings is unique to the stable coin pools. If we look at BTC and ETH pools for example (figure 4), we see much more regular spikes and dips in earnings. There are still large increases on these same 45, 65 and 74 days after MCCN launch, since traders will be cashing out a portion of their BTC and ETH to stable coins, driving revenue to these pools as well, but these peaks are much less noticeable relative to average daily earnings.
The stable coin pools have low fee earnings in periods of relative market growth or stability, but massively accelerated earnings in market crashes. BTC and ETH pool earnings only accelerate slightly in market crashes, but give a more consistent output across all market conditions.
Slip fees accelerate when traders are fearful:
The second key factor driving Thorchain fee earnings in market crashes is increases in slip fees. Slip fees are a liquidity sensitive fee that increases with the size of a transaction, relative to the depth of a pool. For input and output assets of a swap x and y, with corresponding pool depths X and Y, the slip is x/(x+X). The slip fee is then slip * output, which works out to x²Y/(x+X)². Intuitively, you pay more the more your swap puts the pool out of balance.
The biggest predictor of slip fees is of course pool depth. Plotting the average slip fee across all pools against the Total Value Pooled on the network, we see a very clear trend. As the Total Value Pooled increases, the average slip fee decreases. More liquidity means trades will put pools less out of balance, and hence slip fees decrease. However, the behaviours of swappers also plays an important role in slip fee earnings.
Returning to our stable coin pools (figure 6), we see peaks in USDC and USDT average slip 45 days after launch, corresponding exactly to the sharp drop in Rune price just after it hit its all time high. USDT slip peaks at 0.7%, up from an overall average of 0.35%. Similarly, USDC slip peaks at 0.89%, up from an average of 0.26%. BUSD also sees a small rise to 0.3%, up from an average of 0.06%. This peak corresponds with a dip in market sentiment from greed to extreme fear. When traders panic, they are willing to accept much higher slip fees, which is great news for LPs.
Slip Fees are significantly higher in ETH and ERC-20 Pools than any other:
Slip fees make up a much larger part of fee revenue for ETH and ERC-20 pools than any other. Comparing the average slip by pool in figure 7, we can see slip of course increases as pool depth decreases, but also that it is significantly lower for BEP2 pools. The average slip for all ERC-20 pools is 0.84%, while it is just 0.10% for BEP2 pools.
Part of this difference again comes down to arbitragers. High gas fees on ETH and ERC-20 pools push up the size of a transactions necessary to find a profit in arbitrage, inherently pushing up the slip fee. Another part is down to the behaviours of liquidity providers.
Liquidity providers have a heavy preference to asymmetrically pool Rune in ETH and ERC-20 pools, likely as a means of avoiding paying high gas fees (as a student with limited funds, I know I have used this strategy myself). If for example you wanted to pool ETH and Rune, a symmetric deposit would cost you a 0.02 Rune fee + 3x Ethereum gas fee. However, an asymmetric Rune deposit would cost just 0.02 Rune and your slip fee.
A clear illustration of this playing out can be see if we return to our USDC and BUSD pools. For USDC, a total of 2,457,796 Rune has been deposited to the pool. 1,959,556 of this was deposited as Rune, while just 498,239 was deposited as USDC, which is a ratio of almost 4:1 in favour of Rune. BUSD by contrast saw a much more equitable ratio of 1.16 Rune to Asset across its deposits. This additional slip revenue gives ETH and ERC-20 pools a small and much needed boost in earnings.
Not all pools on Thorchain are built even. ETH and ERC-20 pools benefit from increased slip fees relative to others, but overall are outperformed by BEP2 pools. BEP2 pools, and in particular BUSD, are the best performing on the platform due to their low fees. This increases arbitrage opportunities, which increases trading volume, and hence fee revenues. Market crashes are also a great time to be a Thorchain LP. This is in part due to spiking demand for stable coins, as traders rush to protect their portfolio. It is also in part due to the behaviour of traders. In periods of high fear in the market, they are much more willing to pay high slip fees, which gives a nice boost to LP profits.