Uncovering DeFi Fundamentals: Decentralized Exchanges

Table of Contents
Key Takeaways 4

Market Landscape 5

DEXes Analytical Framework 8

The Evolution of DeFi and Framework for Evaluating DEXes 8
A Note about Tokenomics… 9

DEXes Summary 10

Uniswap 11
UNI Tokenomics 11
UNI Supply 11
UNI Utility 12
View on Tokenomics 12
Uniswap Financials 13

PancakeSwap 14
CAKE Tokenomics 14
CAKE Supply 14
CAKE Utility 15
View on Tokenomics 15
PancakeSwap Financials 16

Curve 17
CRV Tokenomics 18
CRV Supply 18
CRV Utility 19
View on Tokenomics and the Curve Wars 20
Curve Financials 21

Balancer 22
BAL Tokenomics 23
BAL Supply 23
BAL Utility 23
View on Tokenomics and the Balancer Wars 24
Balancer Financials 25

Trader Joe 26
JOE Tokenomics 26
JOE Supply 26

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JOE Utility 27
View on Tokenomics 27
Trader Joe Financials 29

Serum 30
SRM Tokenomics 31
SRM Supply 31
SRM Utility 31
View on Tokenomics 31
Serum Financials 32

Financials and Valuation 33

Financial Metrics 33
Relative Valuation 34
Price-to-Sales (“P/S”) Multiple 34
Price-to-TVL Ratios 37
Dividend Yield 39
Other Ratios 39
Average Revenue per User (“ARPU”) 39
Return on TVL 41

Current Developments and Future Outlook 42

The Role of Aggregators 42
Scenario 1: Status Quo, DEXes remain the dominant players 43
Scenario 2: Aggregators overtake DEXes to facilitate the bulk of trades 43
Scenario 3: Wallets serve as the front-end interface for most trades 43
Strategy for DEXes 44
NFTs X DEXes 44
AMM-based NFT Marketplaces 44
Uniswap x NFTs 45

Closing Thoughts 47

References 48

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Uncovering DeFi Fundamentals: Decentralized Exchanges

Key Takeaways
❖ Most trades today are still conducted through centralized exchanges. The DEX/CEX
ratio rose from 6.8% to 15.3% in 2021 but has declined from its peak of 16.5% in
January 2022 to 13.0% in July 2022. The year-to-date fall is likely contributed by an
overall decline in DeFi activity this year. Nonetheless, the DEX/CEX ratio today is still
nearly double that of the beginning of 2021.

❖ Token emissions are pivotal to the growth and operations of DEXes as they serve to
incentivize liquidity providers to provide liquidity to the platform. However, native
tokens with minimal utility tend to see the value of the tokens erode. Several DEXes
such as PancakeSwap, Curve, Balancer, and Trader Joe have increased the utility of
their tokens and/or introduced locking mechanisms to reduce mercenary selling
pressure.

❖ We analyzed the financial data of six DEXes in this report - Uniswap, PancakeSwap,
Curve, Balancer, Trader Joe, and Serum. None of the DEXes are profitable after
accounting for token emissions related to liquidity mining incentives. Uniswap comes
closest to turning a profit if it passes its fee switch proposal, ceteris paribus. While
being loss-making is not uncommon and is similar to the playbook of early-stage
startups that operate at a loss to bootstrap growth, DEXes should consider taking steps
to minimize cash burn and to achieve operating profit.

❖ In terms of valuation ratios, PancakeSwap generally fared better than average across
most of the metrics analyzed. In terms of other financial ratios such as “Average
Revenue per User” and “Return on TVL”, Uniswap, Curve, and Balancer generally
performed better.

❖ Looking ahead, competition between DEXes and the disruptive threat of aggregators
will likely remain high. DEXes should focus on winning over liquidity providers to
deepen the liquidity of their trading pools. Additionally, DEXes can explore different
ways to increase user stickiness and platform loyalty (e.g. token distribution, better
user experience, competitive fees etc.).

❖ In a positive sign, we have witnessed the amalgamation of previously disparate worlds

of DeFi and NFTs in the form of cross-adoption of technologies (e.g. the adoption of the
AMM model by SudoAMM) and cross-vertical acquisitions (e.g. the acquisition of Genie
by Uniswap) over the past year.

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Market Landscape
Decentralized exchanges (“DEXes”) are a cornerstone of decentralized finance (“DeFi”) and
are one of the most widely used decentralized applications (“dApps”) today. DEXes
facilitate trading of crypto assets without the need for an intermediary by employing smart
contracts to settle transactions. Using Ethereum gas consumption as a gauge of transaction
activity, DEXes account for the largest share of gas consumed on the Ethereum blockchain
in the first half of 2022.

Figure 1: DEXes had the highest Ethereum gas consumption (1H 2022)

Source: gasguzzlers.wtf, Nansen, Binance Research

DEXes recorded slightly over US$714B in trading volume year-to-date as of end-July 2022.
Monthly trading volume has generally been on a downtrend since the start of the year
as crypto market activity fell. The lowest monthly trading volume year-to-date was
recorded in July 2022 with US$56.1B of trading volume. This represents a significant
decline of over 66% in trading volume as compared to the start of the year in January 2022.

Figure 2: Trading volume of DEXes has been on a downtrend year-to-date

Source: Binance Central Data Analytics Team, Binance Research

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Uncovering DeFi Fundamentals: Decentralized Exchanges

By offering a non-custodial and more transparent alternative, DEXes have been competing
with centralized exchanges (“CEXes”) for market share. DEXes appeal to users who value
control over their assets, and users who subscribe to the DeFi ideal of decentralization.
Moreover, the permissionless nature of DEXes allows LPs to provide liquidity and create
new pools with lower barriers to entry. Projects can work with DEXes to launch their tokens
on the respective platforms.

Today, while DEXes have their fair share of adoption, CEXes continue to command the
lion’s share of total trading volume. The DEX/CEX ratio, which measures the trading
volume of DEXes relative to CEXes, increased from 6.8% to 15.3% over 2021 but has
declined from its peak of 16.5% in January 2022 to 13.0% in July 2022. The year-to-date
decline is likely contributed by an overall fall in DeFi activity across the board. Nonetheless,
the DEX/CEX ratio today is still nearly double that of the beginning of 2021. It remains to be
seen whether this trend will reverse. Interestingly, Changpeng Zhao (“CZ”), the CEO of
Binance, mentioned in a recent interview that “decentralized exchanges will be bigger than
centralized exchanges” in five to ten years.1

Figure 3: DEX / CEX ratio rose over 2021 but has decreased since the start of the year

Source: The Block, Binance Research

Competition within the DEXes ecosystem is fierce, with numerous players competing for a
piece of the pie. Nonetheless, Uniswap (V2 and V3) has demonstrated strength and has
consistently maintained its lead. As of end-July 2022, Uniswap has over 60% market
share in the DEX space, significantly higher than any other DEX. In terms of average
market share year-to-date, PancakeSwap comes next with a monthly average of ~11%

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market share, contributed by its stronghold within the BNB ecosystem. For context,
PancakeSwap is the leading dApp on the BNB chain with over 56% dominance in terms of
total value locked (“TVL”).2

Figure 4: Uniswap leads the pack in terms of DEX market share

Source: Binance Central Data Analytics Team, Binance Research

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Uncovering DeFi Fundamentals: Decentralized Exchanges

DEXes Analytical Framework

The Evolution of DeFi and Framework for Evaluating DEXes
DeFi has evolved significantly since the DeFi summer of two years ago. Apart from the
developmental progress of dApps, users’ trading behavior and how they evaluate DEXes
have changed over time.

In the initial stages of DeFi, yields were all that users were focused on. The general mantra
seemed to be “the higher, the better”. At the height of DeFi summer, annual percentage
yields (“APYs”) of a few thousand percent were not uncommon, and this phase was
characterized by money chasing after high yields. Unsurprisingly, this was not sustainable -
many of the tokens plunged in prices after liquidity dried up.

As demand for astronomically high APYs waned, users needed another way to compare and
evaluate the health of a protocol. This ushered in the era of TVL, which seemed to be the
perfect metric to gauge demand for the protocol given that it represents the amount of
assets deposited. Ease of TVL data availability also contributed to the popularity of the
metric among retail users. Protocols with the highest TVLs were seen as leaders in their
respective fields, and gave the sense of being “too big to fail”. However, TVL has its own
drawback - protocols can boost their own TVL by attracting assets through inflationary
token incentives. Moreover, a protocol can show up on the TVL scoreboard for a short
period of time but drop off when token incentives run out or if the protocol fails to attract
sustainable demand for its services.

Today, investors are increasingly focused on fundamentals. Vanity metrics such as APYs
and TVL have taken a back seat and the sustainability of business models are coming to the
fore. While many DeFi projects have generated strong revenue, there has been
increased scrutiny on the profitability and fee accrual mechanism of these projects as
more focus is placed on whether the projects can tide through the current bear market and
as investors analyze how returns flow to token holders.

This leads us to our framework for evaluating DEXes in the upcoming sections. We focus our
analysis on fundamentals of the DEXes and also take a look at quantitative data. The
evaluation framework includes:

❖ DEX Overview: High-level information about the protocol

❖ Tokenomics: Supply and demand of tokens, including utility, and token distribution
❖ Financials: Income statement and profitability analysis
❖ Valuation: Valuation ratios such as Price / Sales, and Market Capitalization / TVL

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We evaluate profitability of DEXes by netting off the trading fees to liquidity providers, as
well as token emissions related to liquidity mining / staking rewards. The latter can be
thought of as operational expenses (eg. marketing expenses) that are necessary to run the
protocol, without which the DEX would likely not be operationally viable.

A Note about Tokenomics…

Before launching into a discussion about each specific DEX, we wanted to take a moment to
share some observations about the tokenomics of DEXes. Native DEX tokens are pivotal in
incentivizing liquidity provision on the platform by providing additional returns to liquidity
providers who park their assets with the respective DEXes. Without the additional token
rewards, liquidity providers may not be sufficiently incentivized by trading fees alone to
deposit their assets with the DEX. As such, token emissions contribute to the operations
and sustainability of DEXes as a form of liquidity incentive scheme.

However, the challenge that comes with incentivizing liquidity provision through token
emissions is that DEXes often see the value of their native tokens erode. This is
especially true for tokens with minimal utility as liquidity providers without a sufficient
reason to hold the token would sell the native tokens. Moreover, mercenary capital may
come into the DEX to farm rewards just to sell them on the market before moving on after
the capital dries up. An increase in selling pressure would translate into falling token prices,
which then results in requiring more native tokens to be paid out to maintain the level of
rewards. Ultimately, this can be attributed to a misalignment of interests between token
holders (who are interested in the longevity of the DEX) and liquidity providers (who are
typically interested in yields).

A corresponding observation we have made in our analysis is the increase in the

number of DEXes trying to find ways to increase the utility of their tokens, or to put in
place some form of locking mechanism. In our view, this is positive and is a critical
development in DEX tokenomics to reduce mercenary selling pressure. Where relevant, we
highlight a few of these developments in the following DEX-specific sections.

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DEXes Summary
Uniswap V3 Uniswap V2 PancakeSwap Curve Balancer Trader Joe Serum

Blockchains ● Ethereum ● BNB Chain ● Ethereum ● Ethereum ● Avalanche ● Solana

● Polygon ● Arbitrum ● Polygon
● Optimism ● Aurora ● Arbitrum
● Arbitrum ● Avalanche
● Celo ● Fantom
● Gnosis ● Harmony
● Moonbeam ● Optimism
● Polygon
● xDai
● Moonbeam
● Gnosis

TVL US$4.94B US$1.61B US$3.33B US$6.27B US$1.58B US$229M US$114M

Circulating Market US$6.7B US$617M US$720M US$273M US$117M US$279M

Cap

Fully Diluted US$8.9B US$3.2B US$4.6B US$657M US$179M US$10.7B

Valuation

No. of Pairs 811 2,497 4,284 76 73 305 344

Top Traded Pairs ● USDC/WETH ● USDC/WETH ● WBNB/BUSD ● USDC/USDT ● USDT/USDC ● WAVAX/USDC ● SOL/USDC
(24H) ● USDC/USDT ● HDRN/WETH ● WBNB/USDT ● DAI/USDC ● LDO/ETH ● WETH/WAVAX ● MSOL/USDC
● WBTC/WETH ● CWEB/USDC ● GHNY/WBNB ● DAI/USDT ● USDC/ETH ● WAVAX/USDT ● WETH/USDC

Swap Fees 0.01% - 1% 0.30% 0.25% 0.04% 0.0001% - 10% 0.30% 0.04%
(Fee Split) (100% LPs) (100% LPs) (68% LPs, 12% (50% LPs, 50% (50% LPs, 37.5% (~83% LPs, ~17% (20% to project
Treasury; 20% buy veCRV holders) veBAL holders, protocol fees) host, 80% buy
and burn) 12.5% DAO) and hold)

Source: DEXes’ website, Defi Llama, Coinmarketcap, CoinGecko, as of 12 August 2022

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Uniswap
Since its launch in 2018, Uniswap has introduced several variations and developments to
the protocol. The first version, Uniswap V1, only offered ETH-ERC20 pairs. While having a
constant numeraire in ETH allows for ease of comparison of token values, a user who wants
to swap between ERC20 tokens will incur higher costs and slippage as it is needed to bridge
between ETH. Uniswap V2 overcame this by allowing ERC20-ERC20 swaps without
mandatory exposure to ETH. The launch of Uniswap V3 ushered in novel features such as
concentrated liquidity and flexible fee structures that have differentiated Uniswap from its
competitors. In particular, concentrated liquidity improves capital efficiency by allowing
LPs more control over the price ranges in which their capital is used.

Over time, Uniswap has continued to innovate and develop its platform in response to
market needs and demands. This is a positive sign and has contributed to their market
leader position in the DEX ecosystem. To provide further perspective, Uniswap trade
volume today is nearly that of Coinbase. Specifically, since January 2022, Uniswap’s market
share of volume relative to Coinbase has surged from 27% to nearly 50% as of mid-July
2022.3

UNI Tokenomics
Uniswap introduced their native governance token UNI in September 2020 and airdropped
the UNI token to early adopters of the protocol. UNI token holders can participate in
protocol governance and vote for changes to the protocol.

UNI Supply
1 billion UNI tokens were minted at genesis and will vest over 4 years (starting from 2020).
The initial allocations were split amongst community members, team, investors, and
advisors. After 4 years, there will be a perpetual annual inflation rate of 2%.4

Figure 5: Majority of UNI’s initial supply was allocated to the community

Source: Uniswap, Binance Research

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UNI Utility
❖ Governance: UNI token holders can participate in the governance of the protocol
and vote on development and upgrade proposals.
❖ UNI Community Treasury: UNI token holders can vote to allocate UNI towards
grants, strategic partnerships, governance initiatives, additional liquidity mining
pools, and other programs.
❖ Protocol Fee Switch: Currently, there are no protocol fees. However, UNI holders
can vote for protocol fees to be turned on in the future.

View on Tokenomics
At the moment, the primary use case for the UNI token is protocol governance. Notably, the
lack of a protocol fee means that the UNI token does not accrue any direct value from
transactions currently. The fee switch mechanism has been a topic of debate among the
community. If activated, protocol revenue will be distributed to UNI token holders. For
Uniswap V2, protocol fee will be 0.05% when switched on, reducing liquidity provider fee
from 0.30% to 0.25%. For Uniswap V3, a fraction of swap fees (up to 25%) will go towards
the protocol rather than liquidity providers when turned on. Current swap fees are between
0.01% to 1% for V3.

In our view, while UNI holders seem to benefit directly from the monetization of the
protocol, the cascading effects of turning on the fee switch is less straightforward than
it seems. Referencing traditional start-up models, network-based businesses tend to grow
their network as much as possible in the initial stages (even at the expense of operating at a
loss) to a point when switching costs for users become too high before they start
monetizing the platform. In the case of Uniswap, the reduction in rewards for LPs could
result in a slowdown in growth of the protocol. In the worst-case scenario, a reduction in
yield disincentivizes LPs to provide liquidity which could result in higher slippage. Higher
execution costs could in turn lead to lower trading volume as traders move to other DEXes,
resulting in lower overall protocol revenue. The end result might be a lose-lose situation
for both liquidity providers and UNI holders.

To put some numbers to this discussion, Uniswap’s annualized fees are approximately
US$544M at the time of writing.5 Assuming protocol swap fees are turned on and set at
10%, this translates to US$54.4M / year of protocol fees. Based on the current market
capitalization of $6.7B, this implies a mere ~0.8% APR.

That said, turning on the fee switch could be a positive price catalyst for the UNI token and
could help bolster the Uniswap DAO’s treasury which is largely denominated in native UNI
tokens. An alternative middle ground could be to kick start the fee switch process with

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a small nominal fee. Fees can then be adjusted accordingly depending on the initial
feedback. At the time of writing, Uniswap has just passed the “consensus check” phase of
its governance process to pilot a fee switch that is proposed to run for 120 days. The pilot
proposes for a 10% protocol fee to be applied to selected pools.6

Uniswap Financials

Income Statement

Q3 2021 Q4 2021 Q1 2022 Q2 2022

Total Revenue (Total Fees) $307,799,592 $468,263,696 $311,387,513 $232,043,228

QoQ Change 52.1% -33.5% -25.5%

Less: Fees to LP -$307,799,592 -$468,263,696 -$311,387,513 -$232,043,228

Protocol Revenue $0 $0 $0 $0

QoQ Change N.A. N.A. N.A.

Protocol Margin 0.0% 0.0% 0.0% 0.0%

Less: Token Emissions $0 $0 $0 $0

Net Income $0 $0 $0 $0

QoQ Change N.A. N.A. N.A.

Net Income Margin (%) 0.0% 0.0% 0.0% 0.0%

Source: Token Terminal, Binance Research Estimates

Uniswap generated over US$232M in revenue in Q2 2022, of which all of that went to
liquidity providers as it has yet to turn on the fee switch. Depending on the outcome of the
fee switch discussion, 10-25% of the revenue could accrue to the protocol. Note that
Uniswap does not provide liquidity mining incentives through token emissions currently.
Assuming this does not change, Uniswap could become profitable if the fee switch proposal
is turned on, ceteris paribus.

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PancakeSwap
PancakeSwap is a DEX built on the BNB Smart Chain with an Automated Market Maker
(“AMM”) model for swapping BEP-20 tokens. Apart from offering swaps, the platform also
has other features such as yield farming, perpetual trading, NFT marketplace, and others.

PancakeSwap is the largest DEX on the BNB Chain by TVL, accounting for over 56% of TVL
on the chain. At the time of writing on 12 August 2022, PancakeSwap has over $3.3B in
TVL. In terms of user activity, PancakeSwap had over 2.3M users, and facilitated 26M
transactions over the past 30 days.7

CAKE Tokenomics
The protocol’s native token is CAKE, a BEP-20 token on the BNB Smart Chain. Over the past
few months, PancakeSwap has introduced several changes to its tokenomics model.
Specifically, in V2 of its tokenomics model, PancakeSwap passed a proposal to cap the
maximum supply of CAKE to 750M. The DEX also improved the utility of the CAKE token
by adding additional use cases for locked CAKE in the form of weighted voting, boosted
farm yields, and boosted initial farm offerings (“IFO”) allocation.

CAKE Supply
The initial distribution of the CAKE token included 75% allocation to farmers and 25% to
SYRUP token holders.

Figure 6: CAKE’s initial supply was split between farmers and SYRUP token holders

Source: PancakeSwap, Binance Research

CAKE is inflationary - there is an emission rate of 40 CAKE per block, of which

approximately 28.85 is burned, resulting in effective emission of roughly 11.16 CAKE per
block or around 321.2K CAKE per day.8 The end goal is to make CAKE emission-neutral or
deflationary. Assuming no changes to the current emission rate, there will be an

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approximate runway of 3 years before the maximum 750M CAKE supply is reached. There
are also other deflationary measures to keep inflation in check by burning CAKE.

Figure 7: CAKE Emissions Table

Emission/block (CAKE) Emission/day (CAKE)

Emission 40 1,152,000

Burned Weekly ~28.85 ~830,800

Effective Emission ~11.16 ~321,200

Source: PancakeSwap

CAKE Utility
❖ Governance: CAKE represents the governance token for PancakeSwap, allowing
users to vote on proposals.
❖ Staking Yield: Holders earn trading fees by providing liquidity using CAKE, or can
stake CAKE to earn other types of tokens.
❖ Locked CAKE Derivatives: Locked CAKE derivatives provide additional benefits
such as boosted IFO benefits (iCAKE), boosted voting power (vCAKE), and boosted
farm yields (bCAKE).

Locked CAKE derivatives benefit users who lock their CAKE in the fixed-term CAKE staking
pool. iCAKE determines the maximum CAKE a user can commit in the PancakeSwap IFO
public sales. The number of iCAKE a user has is calculated based on the number of CAKE
staked in the fixed-term CAKE staking pool and the total staking duration. vCAKE
represents boosted voting power based on a user’s fixed-term CAKE staking position.
Generally, the longer the remaining duration of the staking position, the higher the vCAKE a
user has. Finally, bCAKE represents boosted farm rewards. It is a boost multiplier that
allows users to boost their CAKE yield up to two times from selected farms.

View on Tokenomics
The PancakeSwap team has proposed several revisions to CAKE’s tokenomics over the last
few months in V2 of its tokenomics model. This includes a cap on the maximum supply of
CAKE, as well as the introduction of locked CAKE derivatives.

In our view, these revisions have a positive impact on both the supply and demand of
the CAKE token, and contribute to a better tokenomics model for CAKE. Firstly, the
introduction of a maximum CAKE token supply removes the possibility of unlimited token
emissions that would contribute to significant dilution and inflation. The capped supply also

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helps investors make better investment decisions by giving a sense of the fully diluted value
of CAKE. Secondly, the locked CAKE derivatives and the corresponding benefits that come
with it increases the utility of the CAKE token. Similar to the vote-escrowed CRV (“veCRV”)
model of Curve Finance (elaborated in a later section), locking removes some selling
pressure of the CAKE token, and contributes to a lower circulating supply of the token.
Finally, rewarding holders who lock their CAKE for a longer period of time also aligns the
interests of token holders with that of the protocol.

PancakeSwap Financials
Income Statement

Q3 2021 Q4 2021 Q1 2022 Q2 2022

Total Revenue (Total Fees) $159,107,001 $288,362,778 $135,275,029 $109,231,011

QoQ Change 81.2% -53.1% -19.3%

Less: Fees to LP -$108,192,761 -$196,086,689 -$91,987,020 -$74,277,088

Protocol Revenue $50,914,240 $92,276,089 $43,288,009 $34,953,924

QoQ Change 81.2% -53.1% -19.3%

Protocol Margin 32.0% 32.0% 32.0% 32.0%

Less: Token Emissions -$522,757,800 -$453,449,600 -$221,521,500 -$162,089,200

Net Income -$471,843,560 -$361,173,511 -$178,233,491 -$127,135,276

QoQ Change 23.5% 50.7% 28.7%

Net Income Margin (%) -296.6% -125.2% -131.8% -116.4%

Source: Token Terminal, PancakeSwap, Binance Research Estimates

PancakeSwap generated over US$109M in total revenue in Q2 2022, of which around 68%
of that accrues to the LPs. Similar to other DEXes, a large part of expense comes from token
emissions which resulted in a net loss of around US$127M in Q2 2022.

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Curve
Curve Finance started out differentiating itself through its focus on offering swaps between
stablecoins or similarly priced assets (e.g. ETH/STETH) with low slippage. Given the variety
of stablecoins (e.g. USDT, USDC, BUSD etc.) and the numerous use cases for stablecoins,
the demand for capital efficient and low slippage stablecoins swaps is high. One of the most
utilized pools is Curve’s 3CRV pool which consists of DAI, USDC, and USDT. Since its launch,
Curve has grown quickly to be one of the leading DEXes by facilitating low-slippage swaps
between stablecoins.

Curve launched its V2 update in June 2021 which allows swaps between non-pegged
tokens. Curve V2’s mechanism holds some similarities to Uniswap V3 in that it also relies on
concentrated liquidity. However, unlike Uniswap V3, LPs are unable to choose their liquidity
range. Instead, Curve V2 automatically concentrates liquidity around an internal oracle
price, which is a moving average of executed trades. The pools also have fees ranging
between 0.04% to 0.40% that adjust dynamically depending on the difference between the
internal price oracle and the actual price of the assets.

Figure 8: Comparison of AMM invariants - Constant-product (dashed), StableSwap (blue)

and Curve V2 (orange)

Source: Curve

The chart above illustrates the curves of a few different AMM invariants. The traditional
constant product model (dashed line) results in a distribution of liquidity across the entire
curve from ‘0’ to ‘∞’. To improve capital efficiency and to allow lower slippage of
similarly-priced assets (e.g. stablecoins), Curve V1’s StableSwap invariant design (blue line)
concentrates liquidity near ‘1’. Curve V2 (orange line) has a curve that is largely similar to
the StableSwap curve for small price movements, but displays asymptotic behavior when
there are large fluctuations in prices of non-pegged assets.

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CRV Tokenomics
CRV is CurveDAO's native governance token which gives token holders the ability to vote on
governance proposals for the protocol. Curve introduced a vote locking mechanism that
was also adopted by other protocols. With this mechanism, users are incentivized to lock
their CRV tokens for up to 4 years in exchange for vote-escrowed CRV (“veCRV”)
tokens. Locking is irreversible and the corresponding amount of veCRV received depends
on the amount and duration the token is locked. Generally, the longer the locked duration,
the more veCRV received. More details on the utility of veCRV are available in the section on
“CRV Utility”.

CRV Supply
The total supply of 3.03B is distributed with the bulk of allocation to liquidity providers. The
remaining is split among shareholders, employees, and the community reserve.

Figure 9: Majority of CRV’s total supply is allocated to liquidity providers

Source: Curve, Binance Research

There is currently more than half of CRV tokens being locked as veCRV with an average lock
duration of 3.60 years.9 While the current inflation rate is high at approximately 12%, the
locking mechanism reduces the selling pressure of the token as there is less available CRV
supply in the market.10

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Figure 10: veCRV as % of total CRV has been increasing steadily

Source: Dune Analytics (@mrblock_buidl), Binance Research

CRV Utility
For each trade that is executed on Curve, liquidity providers to the pool earn a percentage
of fees in the form of CRV tokens. While this incentive model is not new to DEXes, what
makes Curve’s tokenomics stand out is its veCRV model. CRV by itself has limited utility,
but use cases expand significantly when the CRV tokens are locked and exchanged for
veCRV. In general, utility has two broad components - governance, and rewards.

❖ Governance: veCRV holders can vote on DAO proposals and can vote for gauge
weights which are used to determine how much CRV rewards each pool gets.
❖ Staking Rewards: 50% of all trading fees are distributed to veCRV holders.
❖ Boosting Rewards: veCRV allows token holders to boost rewards of up to 2.5x on
their provided liquidity.

Figure 11: veCRV offers additional utility over CRV

Source: Curve Finance

In summary, CRV holders have monetary incentives to lock CRV as it increases how much
they earn from providing liquidity, and also gives passive income from all Curve pools in the
form of trading fees.

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View on Tokenomics and the Curve Wars

The discussion on Curve tokenomics is not complete without mentioning the Curve Wars.
The Curve Wars is effectively a fight for liquidity capture in which projects compete to
acquire as much CRV as possible to increase its influence and strengthen their position in
the ecosystem.

Generally, higher liquidity of a project’s token is preferred as it minimizes slippage and

encourages trading. For a project with their tokens listed on Curve, the advantage of holding
veCRV includes being able to incentivize liquidity of their own tokens by directing their
votes to dictate where the CRV inflation should go. In other words, projects can vote for
their own pools to boost the pool’s APY such that LPs are incentivized to provide liquidity to
that pool. The more veCRV a project holds, the larger the influence they have over the gauge
weights which determine the amount of CRV rewards allocated to each pool.

Given the direct impact of veCRV on liquidity of Curve pools, the competition by projects to
acquire and stockpile veCRV is what has been termed as the Curve Wars. Losing the war
leads to a fall in yield for the project’s liquidity pool, and capital may move elsewhere in
search of higher yield.

Figure 12: Convex has the highest share of veCRV

Source: Dune Analytics (@banteg), Binance Research

At present, Convex Finance has emerged as the leader in the Curve Wars, holding
approximately 48% of circulating veCRV. This means that Convex Finance has the most
voting power in Curve’s governance and has the most influence to direct CRV rewards on

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Curve pools. Convex Finance has been able to capture a large share of veCRV by allowing
LPs to earn boosted yields without needing to lock up excess capital in veCRV. Short of
diving into details, there is a related but disparate “Convex War” that has ensued among
protocols vying for Convex’s governance token to influence how Convex should put its
veCRV to use.

Overall, the veTokenomics model of Curve is interesting and has inspired a few other
protocols to adopt a similar model. Despite the high inflation of CRV, Curve has discovered a
way to offset the selling pressure of its native CRV tokens by introducing a locking
mechanism for the tokens. At the same time, it has exhibited the beauty and promise of
DeFi in terms of composability as projects such as Convex build on top of Curve to
streamline and simplify the vote escrow process.

Curve Financials
Income Statement

Q3 2021 Q4 2021 Q1 2022 Q2 2022

Total Revenue (Total Fees) $12,551,552 $39,467,238 $36,905,166 $24,145,726

QoQ Change 214.4% -6.5% -34.6%

Less: Fees to LP -$6,275,776 -$19,733,619 -$18,452,583 -$12,072,863

Protocol Revenue $6,275,776 $19,733,619 $18,452,583 $12,072,863

QoQ Change 214.4% -6.5% -34.6%

Protocol Margin 50.0% 50.0% 50.0% 50.0%

Less: Token Emissions -$125,438,769 -$219,593,608 -$173,223,421 -$90,454,788

Net Income -$119,162,993 -$199,859,989 -$154,770,838 -$78,381,926

QoQ Change -67.7% 22.6% 49.4%

Net Income Margin (%) -949.4% -506.4% -419.4% -324.6%

Source: Token Terminal, Curve, Binance Research Estimates

Curve generated over US$24M in total revenue in Q2 2022. Around US$12M or 50% of the
fees were paid to liquidity providers. After accounting for token emissions, the protocol had
a net loss of around US$78M in Q2 2022.

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Balancer
Balancer is a DEX that allows users to swap tokens and for LPs to earn rewards by providing
liquidity. Unlike traditional liquidity pool models where two assets have a 50/50 allocation,
Balancer enables the creation of liquidity pools with up to eight different assets in any ratio.
Balancer pools can be thought of as decentralized index funds which automatically
rebalance tokens’ allocations when the ratio diverges from the fixed parameters.

Balancer offers two broad types of pools:

❖ Public pools: These allow anyone to contribute liquidity. Pool creators can
customize the parameters (e.g. token ratios, trading fees etc.) before launching the
pools but cannot alter them thereafter.
❖ Private pools: These enable creators to fully customize the pool, and only the
creator can add or withdraw an asset from the pool. The creator can also adjust the
parameters of the pool, including weightings, assets, and fees.

A key feature of Balancer is its ability to optimize for the best possible swap price across the
multiple liquidity pools on its platform. Given that Balancer has numerous liquidity pools
with different tokens and allocations, some liquidity pools have better prices than others.
Instead of traders manually going through each pool to find the best price, Balancer
employs a Smart Order Routing (“SOR V2”) system to source the trade from multiple pools
and execute the swap in a gas-efficient manner. To facilitate this, Balancer stores all tokens
in a centralized smart contract called the “Vault”.11 As such, instead of having to transfer
ERC-20 tokens out of multiple pools to optimize for the best price and incur gas at each
stage, only a single interaction with the Vault is required. Such a system is especially
beneficial for traders with large or complicated orders involving multiple asset swaps.

Figure 13: Balancer’s vault stores all pool assets in one centralized place

Source: Balancer

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BAL Tokenomics
Balancer passed the veBAL governance proposal and launched the vote-escrow system in
March 2022.12 The veBAL system largely emulates the veCRV model discussed previously
with a few differences. One major difference to Curve is that instead of locking BAL,
Balancer Pool Tokens (“BPTs”) that are received when liquidity is provided to the 80/20
BAL/wETH pool are locked instead. Secondly, the longest duration users can lock BPTs is
one year, as compared to Curve’s maximum 4 years duration. This allows for a shorter
waiting period to transition in the event governance decides to use a new voting system.

BAL Supply
Prior to a recent governance proposal, Balancer had a constant 145K BAL per week
emission for its token previously. The inflation schedule was unsustainable in the long-term
given the unpredictability of the total token supply and the value dilution over time. Along
with the launch of veBAL, a new inflation schedule was introduced which halves inflation
every 4 years. The final BAL supply will be around 94M BAL (based on Balancer’s public
spreadsheet), with the bulk allocated to liquidity providers.13

Figure 14: Liquidity providers will receive the bulk of BAL’s token distribution

Source: Balancer, Binance Research

BAL Utility
To ensure long-term alignment of interests, BAL token holders must lock their BPTs in
exchange for veBAL which has the following utility:
❖ Governance: veBAL token holders can vote for governance proposals. Holders can
also vote on gauges to determine how liquidity mining incentives should be
allocated.
❖ Boosting Rewards: Depending on the duration of the locking period, veBAL holders
can earn boosted liquidity mining rewards of up to 2.5x.
❖ Protocol Revenue: Protocol fee is 50% of the platform’s swap fees, of which 75% of
the protocol fee will be distributed back to veBAL holders.

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View on Tokenomics and the Balancer Wars

As BAL offers no direct utility for holders, BAL token holders are compelled to consider
providing liquidity to the 80/20 BAL/wETH pool to receive BPTs and lock them in exchange
for veBAL. Since the launch of veBAL in end-March 2022, the number of BPTs in the 80/20
BAL/wETH pool has increased from 2.9M to 8.1M as of 11 August 2022. The percentage of
BPTs locked as veBAL has increased steadily since launch and is currently at over 87%,
with an average lock duration of 11.67 months.14

Figure 15: Percentage of veBAL Locked

Source: Dune Analytics (@balancerlabs), Binance Research

Given the vote-escrow mechanism with a corresponding lock period, it is not surprising that
there would be demand for a liquid wrapper for veBAL. Similar to how Convex offers a liquid
alternative for veCRV, there has been an emergence of protocols like Aura Finance that does
the same by building on top of Balancer.

Aura Finance is currently the protocol with the largest veBAL share at 28%.15 Considering
that it launched nearly one month ago in mid-June, the growth has been rapid and
impressive. It allows users to lock their BPT tokens on Aura Finance in exchange for a
tokenized liquid wrapper of veBAL called auraBAL. In the background, Aura will lock the
BPT tokens for the maximum 1-year duration on Balancer.

Similar to the Curve Wars, the environment looks like a perfect set-up for protocols to
compete for influence over Balancer. That said, given the comparatively shorter locking
period of 1 year vs. 4 years for Curve, and also a much smaller TVL for Balancer, the extent
of competition will likely be lower than Curve. It would be interesting to monitor how the
situation plays out over the next few months in this relatively quiet market environment.

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Balancer Financials
Income Statement

Q3 2021 Q4 2021 Q1 2022 Q2 2022

Total Revenue (Total Fees) $19,873,133 $35,321,742 $12,485,870 $14,732,765

QoQ Change 77.7% -64.7% 18.0%

Less: Fees to LP -$19,873,133 -$35,321,742 -$11,237,283 -$7,366,383

Protocol Revenue $0 $0 $1,248,587 $7,366,383

QoQ Change N.A. N.A. 490.0%

Protocol Margin 0.0% 0.0% 10.0% 50.0%

Less: Token Emissions -$45,183,450 -$39,396,500 -$25,937,600 -$19,415,500

Net Income -$45,183,450 -$39,396,500 -$24,689,013 -$12,049,118

QoQ Change 12.8% 37.3% 51.2%

Net Income Margin (%) -227.4% -111.5% -197.7% -81.8%

Source: Token Terminal, Balancer, Binance Research Estimates

Balancer collected over US$14M in revenue in Q2 2022, of which half of this goes to the
protocol. On a quarter-on-quarter basis, Balancer’s protocol revenue rose in Q2 2022 as it
increased protocol fees from 10% to 50% in end-March 2022. After taking into account
token emissions, Balancer had a net loss of approximately US$12M in Q2 2022.

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Trader Joe
Trader Joe launched in July 2021 and ascended to be the top DEX on the Avalanche
network within a span of 2 months, overtaking the prior market leader Pangolin. Pangolin
was the first DEX on Avalanche but activity on the network was relatively low. Trader Joe
offered a strong DEX alternative for Avalanche traders and successfully siphoned liquidity
away from Pangolin through a combination of marketing efforts and introduction of new
features. The platform provided high yields on AVAX-native pools, and had an attractive
user interface that appealed to the masses.

Today, besides trading, users can also use Trader Joe for staking, lending, borrowing,
trading NFTs, and participating in protocol launches.

JOE Tokenomics
Trader Joe’s native token is JOE. The DEX introduced a new tokenomics model in February
2022 in a bid to increase utility and alleviate the selling pressure of JOE (more details under
“JOE Utility” section).

JOE Supply
JOE has a maximum supply of 500M JOE. The tokens will be emitted over 30 months,
ending in Jan 2024 with the bulk allocated to liquidity providers, and the remaining split
among the treasury, developers, and future investors.16

Figure 16: JOE’s supply will largely be allocated to liquidity providers

Source: Trader Joe, Binance Research

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Uncovering DeFi Fundamentals: Decentralized Exchanges

JOE Utility
Trader Joe revamped its tokenomics and introduced a modular staking model for its JOE
tokens in Feb 2022.17

Previously, users would stake JOE for xJOE, which allows holders to receive a share of the
protocol’s fees in the form of JOE. For every swap on the platform, a 0.05% fee is collected
and used to buy back JOE tokens. Upon unstaking, users will receive the originally
deposited JOE and additional JOE from fee rewards. This is similar to SushiSwap’s xSushi
model as a gas-efficient manner of compounding fee rewards. Beyond that, there are few
other incentives for holding JOE. Given the high inflation of the token, holders would sell
JOE periodically, creating selling pressure on the token.

As part of the tokenomics revamp, Trader Joe increased the number of use cases of JOE
and introduced modularity to the token. This involves breaking down the token into
different components, each with its own utility and yield. Specifically, in the new model,
instead of staking JOE for xJOE, the new staking mechanism consists of 3 staking options
for JOE that users can choose between, or in any combination of the following:

❖ sJOE: Earn platform revenue in the form of stablecoin rewards.

❖ rJOE: Gain access to Rocket Joe launches.
❖ veJOE: Boost farming yields in select farms of up to 2.5x. veJOE holders are also
entitled to governance voting. veJOE is non-transferable and accrues over time by
keeping JOE staked.

View on Tokenomics
Essentially, the modular staking system splits up the JOE token’s utility into protocol fee
rewards, boosted yields and launchpad access rather than combining all features in one
staking token. The modularity of the token allows more flexibility for users to determine
what utility they value more and stake their JOE token accordingly. Currently, most of
the JOE tokens are being staked in sJOE to earn platform revenue in the form of stablecoin
rewards.18

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Figure 17: Most of the JOE staked today are in sJOE

Source: Trader Joe, Binance Research

sJOE offers utility similar to that of xJOE in the form of platform revenue sharing. One key
difference is that the rewards are paid out in the form of stablecoin rewards for sJOE, as
compared to xJOE which paid out rewards in terms of JOE tokens. This offers users the
flexibility of either redeploying the stablecoin back into the JOE ecosystem, or to deploy it
elsewhere. The benefit to the protocol is a reduction in JOE selling pressure in the
secondary market as users who do not want overexposure to JOE no longer have to sell the
additional JOE they receive from staking as the default is to receive rewards in terms of
stablecoins.

rJOE tokens serve as a gateway to launch events on Trader Joe’s launchpad called Rocket
Joe. Users will deposit rJOE to enter a launch. The more rJOE tokens deposited, the higher
the AVAX allocation (100 rJOE to 1 AVAX allocation). rJOE will be burnt for AVAX allocation
credit. Theoretically, as the AVAX ecosystem grows alongside new AVAX projects, there
should be more launches on Rocket Joe and rJOE holders can benefit from participation
through Rocket Joe. This should also raise demand for the JOE token. However, launch
activity has been rather dismal with only seven launches since the start of Rocket Pool in
February 2022.19 The lack of deal flow is likely to weigh on demand for rJOE.

The veJOE model has utilities similar to that of veCRV and veBAL in the form of governance
powers and boosted rewards. veJOE is also non-transferrable. However, instead of having a
locking period, veJOE holders can unstake their veJOE tokens at any time. The caveat is
that they would lose all the veJOE accrued and have to start earning boost from zero. This
ensures alignment of long-term interest of token holders and the protocol as token holders
have added incentive to stake their JOE tokens for a longer period of time. As time goes by,
the increase in accrued veJOE will further reduce the incentive for unstaking as the
opportunity cost of unstaking increases. Similar to the Curve Wars, it is not surprising that a

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“JOE War'' where protocols compete for JOE tokens has emerged. Given the importance of
Trader Joe in the Avalanche ecosystem, it is understandable that projects will want to have
control over the voting gauges once they are enabled, giving them power over liquidity of
the ecosystem. The largest holder of veJOE is Vector Finance which controls over 55% of all
veJOE.20

Trader Joe Financials

Income Statement

Q4 2021 Q1 2022 Q2 2022

Total Revenue (Total Fees) $102,881,462 $58,153,194 $24,703,205

QoQ Change -43.5% -57.5%

Less: Fees to LP -$85,734,552 -$48,460,995 -$20,586,004

Protocol Revenue $17,146,910 $9,692,199 $4,117,201

QoQ Change -43.5% -57.5%

Protocol Margin 16.7% 16.7% 16.7%

Less: Token Emissions -$116,405,856 -$39,988,080 -$17,886,960

Net Income -$99,258,946 -$30,295,881 -$13,769,759

QoQ Change 69.5% 54.5%

Net Income Margin (%) -96.5% -52.1% -55.7%

Source: Token Terminal, Trader Joe, Binance Research Estimates

Trader Joe generated over US$24M in total revenue in Q2 2022, of which approximately
83% was distributed to LPs. As a result, the platform recorded a protocol revenue of
US$4.1M for the quarter. After accounting for token emissions, Trader Joe had a net loss of
approximately US$ 13.8M.

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Serum
Serum is one of the leading DEX on Solana with an on-chain central limit order book
(“CLOB”) system to facilitate trades. It is the product of the Serum foundation, which was
created by FTX and Alameda Research. The order book system allows users to submit
orders with limit prices and specific sizes, as opposed to the typical AMM model.

More than just a DEX itself, Serum can be thought of as a matching and liquidity
infrastructure layer of Solana that aims to power an entire ecosystem of DeFi services
through composability. Serum DEX is able to achieve this through its open-source structure
that allows projects to tap onto Serum’s CLOB and access shared liquidity. As a result,
Serum is able to match orders from one dApp with orders from a completely different dApp
that is powered by Serum. To a user, one might not even be aware that their orders have
interacted with Serum DEX as they could be using a different dApp with a different
front-end interface.

The composability of Serum also means that a myriad of financial applications can be built
on top of Serum. DEXes such as Raydium and Mango Markets have their own user interface
and additional features (e.g. cross-chain, differences in tokens) but are each powered by
Serum’s CLOB. In effect, Serum’s shared liquidity allows it to function as a hub for
liquidity with a strong network effect (the more dApps built on Serum, the stronger its
value proposition) and position it as the liquidity infrastructure layer of Solana.

Figure 18: Serum powers many dApps across different verticals

Source: Serum

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SRM Tokenomics
SRM is the governance token of Serum and is native to Solana. It is also available on the
Ethereum blockchain as an ERC-20 token. MegaSerum (“MSRM”) is created by locking up 1
million SRM. Conversely, 1 MSRM can also be redeemed for 1 million SRM.21 Token holders
benefit from holding SRM and generally receive enhanced benefits for holding MSRM
(compared to holding the equivalent amount of unlocked SRM).

SRM Supply
SRM has a maximum supply of 10 billion SRM. 10% of supply was unlocked initially, with
the remaining 90% that will unlock linearly over 6 years starting from 11 August 2021. SRM
is distributed across ecosystem-related funds, project contributors, team, and investors.

Figure 19: SRM is distributed across a variety of groups

Source: Serum, Binance Research

SRM Utility
❖ Governance: SRM token holders can vote on governance proposals such as making
changes to fees.
❖ Fee Discounts: SRM token holders are eligible for reduced fees (up to 60% off
depending on the amount of SRM held) on dApps that are powered by Serum.
❖ Buy and Hold: 80% of protocol fee revenue goes to a buyback and hold mechanism
for SRM.

View on Tokenomics
On initial assessment, the 24% supply allocation to insiders (20% team and advisors + 4%
locked seed and auction purchaser) looks reasonable. However, there is minimal
transparency with regard to the remaining 76% in terms of how much SRM has been
distributed and to whom.

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Furthermore, a potentially concerning statistic is the low proportion of SRM circulating

supply. Specifically, while SRM has a maximum supply of 10B SRM, and a total supply of
approximately 1.1B SRM, only 263M SRM is in circulation. Compared to the maximum
supply, only 2.6% of SRM supply is in circulation. As the remaining SRM supply comes into
circulation from future token unlocks, existing token holders will experience dilution of
ownership. A somewhat alleviating factor is an agreement from the original Serum team
and some investors to self-enforce further lockups and to reduce sale of SRM tokens
beyond the current 7-year schedule.22

Overall, Serum’s product offering is innovative and the protocol has exhibited its ability to
build a vibrant ecosystem of dApps by facilitating interoperability and composability.
However, investors evaluating the SRM token should take into account the FDV of the token
and high inflation associated with token emissions.

Serum Financials
Income Statement

Q3 2021 Q4 2021 Q1 2022 Q2 2022

Total Revenue (Total Fees) $565,924 $863,148 $1,031,558 $271,508

QoQ Change 52.5% 19.5% -73.7%

Less: Fees to LP -$113,185 -$172,630 -$206,312 -$54,302

Protocol Revenue $452,739 $690,518 $825,247 $217,206

QoQ Change 52.5% 19.5% -73.7%

Protocol Margin 80.0% 80.0% 80.0% 80.0%

Less: Token Emissions -$101,730,969 -$101,230,653 -$40,623,503 -$26,393,494

Net Income -$101,278,229 -$100,540,134 -$39,798,257 -$26,176,288

QoQ Change 0.7% 60.4% 34.2%

Net Income Margin (%) -17896.1% -11648.1% -3858.1% -9641.1%

Source: Token Terminal, Serum, Substack (@TAFC)23, Binance Research Estimates

Serum generated approximately US$271K in total revenue in Q2 2022, a sharp drop of

nearly 74% on a quarter-on-quarter basis. Token emissions form a large part of the
protocol’s expense, contributing to a net loss of approximately US$26.2M, and a negative
net income margin of approximately -9,600% in Q2 2022.

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Financials and Valuation

Each DEX has their own strengths and weaknesses and their operating models vary. A fair
evaluation purely from a qualitative standpoint may be difficult as some DEXes may stand
out in some ways but lack in others (e.g. business model, tokenomics etc.). As such, to
further augment our analysis, we have put together some financial metrics and ratios to
serve as common quantitative data points for comparison.

Financial Metrics
The following table provides a high-level summary of a few indicators in terms of token and
operating metrics, as well as a snapshot of the revenue and profitability of the DEXes.
Numbers used are based on Q2 2022 data.

Figure 20: Summary of DEXes’ Metrics (Q2 2022)

Metrics (Q2 2022)

Pancake Trader
Token Metrics Uniswap Curve Balancer Serum
Swap Joe

Average Price $6.44 $5.84 $1.57 $10.30 $0.65 $1.60

Average FDV (US$B) $20.3 $4.4 $16.5 $3.0 $1.0 $16.0

Average Market Cap (US$M) $4,699.3 $1,476.2 $777.1 $103.1 $150.0 $350.8

Pancake Trader
Operating Metrics Uniswap Curve Balancer Serum
Swap Joe

Average TVL (US$M) $6,409 $4,157 $13,058 $2,507 $694 $438

Trading Volumes (US$M) $166,345 $43,692 $37,222 $10,213 $8,234 $679

Average MAU (Based on

310,160 7,668,746 13,300 13,674 150,295 212,717
Unique Addresses)

Pancake Trader
Income Statement Snapshot Uniswap Curve Balancer Serum
Swap Joe

Total Revenue (US$M) $232.0 $109.2 $24.1 $14.7 $24.7 $0.3

Protocol Revenue (US$M) $0.0 $35.0 $12.1 $7.4 $4.1 $0.2

Net Income (US$M) $0.0 -$127.1 -$78.4 -$12.0 -$13.8 -$26.2

Source: Token Terminal, CoinMarketCap, Defi Llama, Binance Research

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Relative Valuation
We take the quantitative analysis one step further by examining valuation ratios of the
DEXes. This allows a comparison of how the token of each DEX trades relative to others
based on specific ratios and gives a sense of how expensive or cheap the tokens are on a
relative basis.

Figure 21: Summary of DEXes’ Valuation Ratios (Q2 2022)

Financial Ratios (Q2 2022)

Pancake Trader
Valuation Ratios Uniswap Curve Balancer Serum
Swap Joe

P/S (FDV / Annualized Total

21.9 10.0 170.6 51.1 10.1 14,732.5
Revenue)

P/S (FDV / Annualized Protocol

N.A. 31.3 341.2 102.1 60.7 18,415.7
Revenue)

P/E (FDV / Annualized Net Income) N.A. N.A. N.A. N.A. N.A. N.A.

Market Cap / TVL 0.73 0.36 0.06 0.04 0.22 0.80

FDV / TVL 3.17 1.05 1.26 1.20 1.44 36.54

Dividend Yield (Annualized Protocol

0.0% 9.5% 6.2% 21.4% 11.0% 0.2%
Revenue / Market Cap)

Pancake Trader
Other Ratios Uniswap Curve Balancer Serum
Swap Joe

Revenue Per User (Average Monthly

$249.38 $4.75 $605.14 $359.15 $54.79 $0.43
Revenue / Average MAU)

Return on TVL (Annualized Net

0.00% -12.23% -2.40% -1.92% -7.94% -23.91%
Income / TVL)
Source: Token Terminal, CoinMarketCap, Defi Llama, Binance Research

Price-to-Sales (“P/S”) Multiple

The P/S multiple is derived from dividing the fully diluted value of the token by the total
revenue generated. This metric can be thought of as how much you are paying for each
dollar of revenue generated and is a common valuation metric used by investors to consider
if the token is “cheap” or “expensive”. Generally, the lower the P/S multiple, the
“cheaper” it is. However, the reality is that this is not a straightforward exercise of simply
choosing the token with the lowest multiple as there are usually reasons why investors have

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assigned a lower multiple for the token (e.g. poor growth prospects, low profitability etc.).
Regardless, the ratios give a general idea of how the market is valuing a project.

We have calculated the P/S multiple in two ways:

❖ FDV / Annualized Total Revenue: This is based on the total trading fees, including
the fees paid to liquidity providers and the fees accrued to the protocol.
❖ FDV / Annualized Protocol Revenue: This excludes fees paid to liquidity providers
and is based on the total fees accrued to the protocol only.

The overall result is largely the same - Serum, Curve, and Balancer trade at a premium
compared to the rest of the DEXes. In particular, Serum stands out for its astronomical P/S
ratio of 14,733, approximately 400x the median of the sample set. This is contributed by its
extremely high FDV of roughly $16B. To put things into perspective, Serum has roughly the
same FDV as Uniswap even though Serum generates only a fraction (~0.1%) of Uniswap’s
total revenue.

Figure 22: P/S (FDV / Annualized Total Revenue) - CAKE, JOE, and UNI trade at a discount
to peers

Source: Binance Research

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Figure 23: P/S (FDV / Annualized Protocol Revenue) - CAKE and JOE trade at a discount to
peers

Source: Binance Research

As alluded to earlier, the P/S ratio itself may be misleading, and it does not present a full
picture of why a particular DEX is cheap. In fact, a protocol with a low P/S ratio may be a
value trap where it appears like a bargain but is actually fundamentally flawed in some way
or another. As such, to provide an additional perspective, we take the P/S analysis a step
further by comparing the DEXes’ P/S ratios relative to their Q2 2022 revenue growth rate.
This is shown in the next chart. Intuitively, a low P/S ratio with a high growth rate is
preferred.

DEXes above the line fare better with a lower P/S ratio relative to their growth rate. In
particular, PancakeSwap stands out with a relatively low P/S even though its growth
rate is higher than most other DEXes. Note that Serum and Curve have been excluded
from the graph for presentation purposes as they are severe outliers and including them in
the chart would distort the scale, making it difficult to interpret the results. Both Serum and
Curve fall under the line, implying that they trade at a relatively expensive valuation
compared to their growth rate.

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Figure 24: P/S to Growth - CAKE and BAL trade at a relatively low valuation

Source: Binance Research

Price-to-TVL Ratios
Price-to-TVL ratios provide a measure of the token price relative to the TVL in the protocol
and give a gauge of how much investors are willing to pay for each dollar of asset deposited
in the protocol.

We evaluate two metrics here:

❖ Market Cap / TVL: This is derived from dividing the circulating market capitalization
by the TVL.
❖ FDV / TVL: This is derived from dividing the fully diluted revenue by the TVL.

Market Cap / TVL is a widely used metric given ease of understanding and widespread
availability. However, the FDV / TVL ratio may be a fairer metric for comparison across
protocols as it takes into account the maximum total supply of each protocol’s tokens. A
protocol may have a low market cap / TVL ratio but have a high FDV / TVL due to a small
circulating supply of its tokens. Nonetheless, we present both metrics in this section for
completeness.

Generally, a lower price-to-TVL ratio is preferred. However, note that these ratios do not
factor in the capital efficiency of the protocol in terms of how effective it is at extracting
value per dollar of TVL locked. For example, a protocol can command a large TVL but this
does not necessarily translate into higher revenue for a variety of reasons (e.g. low trading
fees, low trading volume etc.).

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Overall, based on FDV / TVL, PancakeSwap, Balancer, and Curve trade at a discount to
the median of the sample set. PancakeSwap has one of the highest TVL across the DEXes,
thereby contributing to a low FDV / TVL.

Figure 25: Market Cap / TVL - BAL, CRV, and JOE trade below the median

Source: Binance Research

Figure 26: FDV / TVL - CAKE, BAL, and CRV trade below the median

Source: Binance Research

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Dividend Yield
Dividend yield represents the cash flow generated by the DEX that is attributable to token
holders. It is computed by dividing the annualized protocol revenue to token holders by the
market capitalization.

Generally, a higher yield is preferred as it represents higher returns back to token

holders. However, given that dividend yields are inversely related to token price, a rise in
yield may not necessarily be a good sign if it is driven by a fall in token price.

In this aspect, Balancer, Trader Joe, and PancakeSwap have dividend yields higher than
the median. Specifically for Balancer, this is contributed by an increase in the protocol
swap fees from 10% to 50% in March 2022. This resulted in Balancer having the highest
protocol margin across the DEXes in this sample.

Figure 27: Dividend yield - BAL, JOE, and CAKE have higher than median yield

Source: Binance Research

Other Ratios
Average Revenue per User (“ARPU”)
ARPU is commonly used to examine a company’s revenue generation capabilities for each
user on the platform. Specifically, it is calculated by dividing the amount of revenue
generated by the number of active users in a specific period. ARPU is able to provide
insights with regard to the type of users of the platform and can be used to calculate how
many new users need to be acquired to achieve a specific revenue target.

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Examining ARPU data across the DEXes reveals an interesting insight - there is a large
disparity between DEXes that facilitate swaps predominantly on Ethereum and DEXes
that predominantly facilitate swaps on other layer 1s (“L1s”). Specifically, Uniswap,
Curve, and Balancer stand out with ARPU in the hundreds of dollars, as compared to Trader
Joe, PancakeSwap, and Serum which have ARPUs in the realms of a few dollars (or as low
as $0.43 on Serum). That said, this does not mean that the DEXes with lower ARPUs are
underperforming.

Rather, the disparity is likely attributed to the differences in structural ecosystem traits
such as differences in trade sizes and the type of users. Swaps conducted on the
Ethereum network tend to be associated with higher network fees due to the higher gas
cost on Ethereum. As such, it generally makes more economic sense to execute trade sizes
beyond a certain threshold minimum on Ethereum, considering the relatively higher gas
fees. On the other hand, users that are intending to execute trades with lower quantums
will generally turn towards DEXes on other L1s where fees are lower. The end result is that
DEXes that facilitate trades mostly on Ethereum (Uniswap, Balancer, Curve) have
generally higher ARPUs due to the larger trade sizes executed by each user.
Correspondingly, more fees are collected per user. DEXes on the other L1s generally cater
to retail users with smaller trade sizes. While they have lower ARPUs, these platforms
tend to attract significantly more users. For example, PancakeSwap had 7.6M monthly
active users (“MAU”) in Q2 2022 as compared to Uniswap which had less than 5% of that
number with 310K MAU.24 Note that we use the number of unique active addresses as a
proxy for number of active users.

Figure 28: Average Revenue per User - CRV, BAL, and UNI have above average ARPU

Source: Binance Research

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Return on TVL
The Return on TVL ratio is used as a proxy to measure a DEX’s profitability per dollar of
assets locked on the protocol. This gives a sense of how efficiently the DEX is able to
utilize its deposited assets. It is derived from dividing the annualized net income by the
total value locked on the DEX.

In order of increasing Return on TVL: Serum, PancakeSwap, Trader Joe, Curve, Balancer,
Uniswap. A general observation is that the Return on TVL ratio is negative across all the
DEXes (except Uniswap). The negative Return on TVL is primarily attributed to token
emissions from each DEX to incentivize LPs to contribute liquidity to the liquidity pools. As a
result, the DEXes are paying out more money than they are making. Nonetheless, the token
emissions are critical to bootstrap the growth and sustainability of the DEXes as they
provide additional compensation to liquidity providers beyond trading fees.

Figure 29: Return on TVL - UNI, BAL, and CRV have higher return than average

Source: Binance Research

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Current Developments and Future Outlook

The Role of Aggregators
Traders typically have one main goal in mind when they place an order - best execution.
Given the vast number of DEXes in the market today, liquidity is split across a variety of
DEXes and it would be very time consuming for traders to visit each DEX to find the best
possible price for each trade they would like to place. This is where DEX aggregators such
as 1inch, 0x API, and Matcha come in.

DEX aggregators intelligently route orders across different DEXes to optimize for the best
execution price. This is especially beneficial for large traders who are platform-agnostic,
and where their primary focus is best execution. While aggregators’ market share has not
been growing year-to-date, its share of the pie is not small. Today, aggregators have
approximately 23% market share in terms of trading volume.

Figure 30: DEXes have a higher market share than aggregators (based on trading volume)

Source: Dune Analytics (@kryptonative), Binance Research

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Looking ahead, there are three scenarios that may play out.

Scenario 1: Status Quo, DEXes remain the dominant players

In this case, a small number of DEXes will command the bulk of liquidity and as a result,
dominate the market. Traders will source for best execution by visiting these few DEXes
that tend to offer the best prices. It would be a competition for liquidity and smaller
DEXes may find it hard to compete. DEXes will continue to control the user relationship.

Scenario 2: Aggregators overtake DEXes to facilitate the bulk of trades

In this scenario, traders will utilize aggregators to facilitate trades and the bulk of trading
volume will be routed to DEXes via aggregators. In effect, DEXes will play the role of
market makers and orders will primarily come from aggregators. Aggregators will control
the user relationships.

Scenario 3: Wallets serve as the front-end interface for most trades

Here, traders will primarily interact with commonly-used wallets such as Metamask to
swap tokens. Orders are routed through aggregators or DEXes, and wallets will control
the user relationships.

While aggregators’ market share have remained relatively stable, it is not unfathomable
that this might increase over time given the value proposition of aggregators. A good
reference material is the Aggregation Theory by technology analyst Ben Thompson25 which
describes how aggregators have come to dominate the industries they are in. The general
idea is that successful aggregators have direct relationships with their customers and can
help users reap value through discovery and curation. The end result is a control over
end-user demand and a commoditization of suppliers. This is highly applicable to DEXes
given that supply is undifferentiated and the primary focus of traders is best execution.
Aggregators can disrupt the DEX industry by allowing traders to access total liquidity in
an ecosystem and end up controlling end-user demand.

Additionally, wallets such as Metamask have introduced swap features to facilitate trades
between tokens, further fueling competition within the space. For example, despite a
relatively high swap fee of 0.875%, Metamask has facilitated over US$22B of cumulative
trading volume since inception, with over 1.3M unique accounts.26 By streamlining the
number of interfaces that a trader interacts with, and by aggregating DEXes’ supply to
provide low slippage trades, wallets have the potential to onboard a significant number
of traders and change users’ trading behavior.

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Strategy for DEXes

Importantly, the rise of aggregators and wallets implies that the true customers of DEXes
are not traders, given that traders are platform-agnostic and may end up never interacting
with the DEX. Instead, the main focus of DEXes should be to improve the experiences of
liquidity providers and to win a large share of liquidity in the market. By doing so, a DEX
would be able to position itself as the go-to DEX with deep liquidity and continue reaping
trading fees even if most trades in the future end up being conducted through aggregators
or wallets.

That said, traders remain an important part of the ecosystem and should not be neglected.
DEXes should strive to build brand loyalty to increase user retention. A combination of
token distribution, improved user interface / user experience (UI/UX), competitive fees, or
additional platform features can be considered. The goal is to increase user stickiness
and find ways to grow the platform such that high switching costs reduce desire of
users to move to other DEXes or aggregators.

NFTs X DEXes
Over the past year, we have witnessed several market developments that have brought
together the DeFi and NFT ecosystems. Specifically, we have seen new marketplace
launches that have adopted the AMM technology traditionally associated with DEXes, and
also an acquisition of a NFT aggregator by a major DEX. Given certain similarities between
NFTs and DeFi in terms of market participants’ trading behavior and underlying products
(digital tokens), it would be unsurprising to see further cross-adoption of technologies
between both worlds in the future.

AMM-based NFT Marketplaces

Currently, the bulk of NFT trading activities occur on NFT marketplaces such as OpenSea,
Magic Eden, and X2Y2. While these have been widely adopted as the primary venues for
NFT trading, there exists drawbacks to such auction-based marketplaces. The lack of
instant liquidity for sellers, and the lack of yield for NFT owners have spurred some projects
to develop alternatives to the current offerings.

For example, SudoAMM that was launched a few months ago adopted an AMM design and
even the concentrated liquidity feature of Uniswap V3 to facilitate NFT transactions.27
Similar to most DEXes, SudoAMM uses on-chain liquidity pools rather than off-chain order
books to conduct swaps. LPs can deposit into single-sided buy or sell pools, or even deposit
on both sides to capture fees. The bonding curve can be chosen when a pool is created,
which determines how prices change as the supply of NFT in the pool changes.

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Figure 31: Three kinds of bonding curves on SudoAMM

Source: 0xmons

The use of bonding curves allow for deterministic and predictable pricing based on
mathematical formulas, resulting in the availability of immediate buy or sell quotes. Traders
in need of instant liquidity can sell their NFTs to the pool at potentially a lower slippage as
compared to accepting the best offer on a NFT marketplace like OpenSea. Admittedly, a big
limitation is the lack of differentiation between NFTs of different rarity. Nonetheless, the
AMM model can be suitable for NFTs with similar rarity (e.g. gaming NFTs).

Overall, the adoption of an AMM design typically associated with DEXes is a novel way
to reinvent and rethink how NFT transactions are settled. We look forward to continued
development of NFT marketplaces as developers apply the best practices of DEXes,
tweaking them to cater to the intricacies associated with NFTs.

Uniswap x NFTs
Uniswap announced the acquisition of NFT aggregator Genie a few months back in June
2022, marking the first major acquisition of a NFT aggregator by a DEX.28 The acquisition
allows Uniswap to integrate NFTs into its products and ushers in the possibility of NFT
trading on Uniswap.

“In pursuit of our mission to unlock universal ownership and exchange,

today we're expanding our products to include both ERC-20s and NFTs.”
- Uniswap

Over the past year, there has been a considerable amount of attention on NFTs. Trading
volume has also been high with the 1-year trading volume exceeding $35B as of end-July
2022.29 The acquisition by Uniswap looks strategic, allowing the leading DEX to expand its
product suite and gain a foothold in the growing NFT market. Moreover, if executed well,

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Uniswap could cement its brand image as the go-to protocol for both fungible and
non-fungible tokens.

Overall, it remains to be seen if more cross-vertical acquisitions will happen. If any,

acquisitions in a challenging market environment will likely be done by the more prominent
DEXes with a larger balance sheet. Nonetheless, such business acquisitions could be
positive for technological development of the space as protocols look to harvest the
synergies in these NFTs X DEXes deals.

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Closing Thoughts
The competitive market landscape has compelled most DEXes to bootstrap growth through
the emissions of native tokens to attract liquidity and retain users. The consequence is that
many of the DEXes today are unprofitable and are likely to remain so at least for the
foreseeable future. Understandably, this is not too different from the typical playbook
employed by many early-stage startups to operate at a loss and prioritize growth in the
short-term. While short-term unprofitability is not uncommon, cash burn can be
concerning. DEXes need a concrete business plan to achieve operating profit and business
sustainability. At the end of the day, cash is limited and highly inflationary tokenomics are
unlikely to be sustainable in the long-term.

As the crypto ecosystem matures and as more sophisticated investors come into the space,
financial ratios and operating metrics are increasingly scrutinized. Fundamentals are
important and investors today should consider both qualitative and quantitative aspects of
a DEX before making any investment decision. Our analysis reveals that certain DEXes
today trade at more reasonable valuations than others.

Besides competition between DEXes, aggregators and wallets also pose a competitive risk
to DEXes by providing value-add through easy price discovery or streamlined user
interfaces. To maintain their edge, DEXes can build a competitive moat by deepening
liquidity, expanding their product suite, or finding alternative sources of revenue streams.

Overall, DEXes are undoubtedly one of the most important verticals of DeFi today. Besides
facilitating billions of dollars in trading volume everyday, DEXes play a key role in the
development of a decentralized future by offering a permissionless and open solution for
trading. The competitive market landscape will spur further innovation in the space and
consequently, benefit the overall ecosystem and its users.

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cts-that-in-10-years-dex-will-overtake-cex/
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f
4) https://uniswap.org/blog/uni
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497d27d4a74be01cd3cad159cf3901b7f
7) https://pancakeswap.finance/
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Nhmu0qJVgs0KI/edit#gid=0
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66
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About Binance Research: Binance Research is the research arm of Binance, the world's leading cryptocurrency
exchange. The team is committed to delivering objective, independent, and comprehensive analysis and aims to
be the thought leader in the crypto space. Our analysts publish insightful thought pieces regularly on topics
related but not limited to, the crypto ecosystem, blockchain technologies, and the latest market themes.

General Disclosure: This material is prepared by Binance Research and is not intended to be relied upon as a
forecast or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities,
cryptocurrencies or to adopt any investment strategy. The use of terminology and the views expressed are
intended to promote understanding and the responsible development of the sector and should not be interpreted
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responsibility to any person by reason of negligence) is accepted by Binance. This material may contain ’forward
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