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Uniswap hard to make money? Pure spot DEX has no future for profit.

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Despite being a leading spot DEX, Uniswap's moat is not as wide as imagined, and its profit potential is worrying.

Original Title: "Uniswap Hard to Make Money? Pure Spot DEX Has No Future"

Original Author: CapitalismLab

$UNI has been widely criticized for being a representative of "meaningless governance tokens". In fact, this is far from simply turning on the split switch and using the income for distribution or buyback. Even as the leader of spot DEX, Uniswap's moat is not as wide as imagined, and its profit potential is worrying. Why is this? This article will analyze it for you with detailed cases and data.

This article will analyze the following points:

1. DEX has weaker connections with users and shallower moats.

2. UNI has not further developed additional value.

3. CEX spot trading is now free, making it even harder to obtain pricing power.

4、UNI If the revenue sharing can be successfully opened, the optimistic scenario is that the protocol income is still not much, the valuation is not low and not enough to cover the team expenses.

DEX has weaker connection with users and shallower protection

The market's expectations for DEX are partly due to the excellent performance of platform coins on CEX in the past. However, there are significant differences between DEX and CEX in many aspects, which result in major differences in their profitability. As shown in the figure below, using Binance to trade spot means that your coins are stored in Binance, and your funds circulate within the Binance ecosystem when you use the Binance app. You constantly establish connections and trust with the Binance ecosystem. On the other hand, Uniswap only plays a role in the trading part, and funds do not stay in Uniswap. Ethereum, not Uniswap, corresponds to Binance, and connections and trust accumulate in Ethereum. In other words, CEX and L1 are at the same level, and spot DEX can only compare with one module in CEX.

This makes it difficult for it to expand horizontally as easily as CEX, and it also faces fierce competition in the ETH ecosystem.

Users can freely switch to competitors such as Curve.

1inch and other aggregator trades fully utilize the overall liquidity of DeFi, resulting in better prices.

The high degree of homogenized competition in the simulation trading industry, rolling and drawing resulting in rolling costs, compressing profit margins.

DEX is one of the few DeFi protocols that does not require users (non-LP) to deposit funds, which makes its historical reputation value slightly lower.

Therefore, although Uniswap dominates in terms of trading volume, if it opens the commission switch, it is likely to have a negative impact on its market share. The UNI community's rejection of the switch proposal also takes this into consideration.

UNI has not further developed additional value

Some people may ask, if Curve takes a 50% cut, why can't Uni do the same? The value of Curve lies in its Ponzi platform and liquidity allocation platform built on DEX. Ponzi is not a disadvantage of Curve, but its advantage. The Ponzi game mechanism that benefits token holders is precisely Curve's biggest advantage. Everyone benefits when the tide rises and falls, and CRV benefits from it. In addition, Curve also solves liquidity problems for projects that require it. Refer to the tweet below to see how Curve thrives in the LSD War.

Take a look at the famous traffic distribution chart below. From a pessimistic perspective, most of the trading volume comes from MEV Bot, reflecting its weak position relative to CEX, with only 13% of the trading volume coming from its own traffic. However, from an optimistic perspective, its own traffic of 13% is much higher than the aggregator traffic of 8%, which has made it difficult for imitators to catch up. The traffic advantage brought by brand value is real, and if Uniswap can do well in other value-added aspects, it can naturally have some profit space.

However, the UNI team has done nothing to add value, resulting in their territory being taken over by imitators. In the Alt-L1/L2 LSD competition, Uniswap V3's imitator Kyberswap was able to secure a piece of the incentive budget from LDO, second only to Curve, because they did a good job with incentives. Imagine how powerful Uniswap would be with a complete incentive and bribe system like Curve, but UNI holders can only dream for now.

CEX Spot Trading Free Wave, Harder to Obtain Pricing Power

What's worse is that in the 22 years, it has become a common phenomenon that the contract trading volume on the top trading platforms far exceeds the spot trading volume. Spot trading has also seen a trend of being free, with Binance offering zero fees for mainstream currency spot trading such as BTC/ETH, and Bybit offering zero fees for all spot trading. This means that for CEX, spot trading has become more of a means of acquiring and maintaining active customers, and making money through derivative trading such as contracts. As a result, Uniswap finds it more difficult to obtain pricing power, and as mentioned earlier, it does not have the same horizontal expansion capabilities as CEX, which can quickly establish an advantage in the derivatives arena.

Source: Tokeninsight

UNI optimistic scenario still has low income, valuation is not low but not enough to cover team expenses

Uniswap's current annual fee revenue is expected to be $434M. Even in the most ideal scenario, if a 10% fee is charged on all trading pairs, the protocol's revenue would only be $43M. The fully diluted market cap/annual revenue (P/S) ratio is 153, while GMX's P/S ratio is 15. Compared to GMX, Uniswap is still 10 times more expensive.

And protocol revenue does not equal profits that can be distributed to token holders, after all, it costs money to maintain a team. How much does the UNI team spend in a year? MakerDAO, which is smaller in scale, spends $34M, while Lido spends $24M. Uniswap has even more employees on LinkedIn than these two, so it is estimated that they will spend $50M in a year. By this calculation, optimistically speaking, Uniswap will still lose $7M a year after deducting $43M from $50M.

Source: Tokenterminal

Actually, a horizontal comparison of Lido/AAVE shows that Uniswap's leading premium PS = 150+ valuation is not too exaggerated. However, Lido clearly benefited from the recent Shanghai upgrade, while AAVE gradually increased its commission rate while maintaining market share. In addition, it may also benefit from the Shanghai upgrade (see the tweet below), while Uni not only missed the LSD market, but also hasn't even turned on a revenue sharing switch yet.

In summary, DEX has a weaker connection with users, and coupled with the team's neglect of building additional value, the introduction of fees by Uniswap may affect market share and growth. Even if it is successful, the current valuation is not low. In fact, if the UNI team is willing to address market demand in the future, it is not impossible to revive its dominance by leveraging its brand advantage. But not today, not now.