POLYDEFI Liquidity Analysis

POLYDEFI Liquidity Analysis

Example: Index Coop On-Chain Liquidity Analysis

We study the adequacy of on-chain liquidity by looking at the liquidity offered by the major DEXs for Polygon. They are Quickswap and Sushiswap. Looking at the large allocations WMATIC, AAVE, SUSHI, and LINK, SUSHI has the smallest LP size at ~ $2.4M. Now, consider a sample AUM size of $50M. At that size, SUSHI token will account for 750K. In the unlikely event of a 10% redemption or minting that occurs clustered together, the demand for liquidity is ~ 75K. This compares to the $2.4M liquidity or approximately 3% of total liquidity. For constant product AMM, this corresponds to a small price slippage of < 5% If such redemption or minting events occur spaced in time or the implementation splits the trade into smaller trades, the LP behavior will be much better and price slippage will be negligible.

Looking at the other end for the lowest liquid tokens in the index...these tokens take a small portion of the index. The smallest LP is for XXX at a little less than $1M. With a similar analysis, we determine that liquidity demand for XXX (for 10% redemption events) to be 150K which is approximately 15% of the LP. In this scenario, it is expected that smaller chunks will need to be executed over time to limit the price slippage to a manageable number below 5%.

Liquidity Sources - POLYDEFI Components

Protocol/TokenPrime EXPrime Pair-$ mm2nd EX2nd Pair - $mm