Introduction

Like every decentralized exchange protocol, liquidity pools are essential to ensure they are working perfectly. Liquidity pool funds are provided by investors commonly known as liquidity providers (LP-ers). LP-ers can add and withdraw funds at any point in time, therefore, it is important that they are properly incentivized to stay in the pools.

Apart from a cut of the trading fees, THORchain provides other incentives such as impermanent loss (IL) protection, which guarantees that LP-ers will always make more than simply holding the tokens. With these incentives, we want to look at whether THORchain has been able to retain its liquidity providers.

Metrics

We begin the investigation by looking at the first time LP-ers ever added liquidity to THORchain pools grouped by month. In the bar chart below, we can see that the last couple of months was the first time most LP-ers added liquidity. This is an indicator that new LP-ers are trooping to THORchain.

Why Are LP-ers Trooping To THORchain?

As I mentioned earlier, THORchain provides insurance/protection against impermanent losses which has been the Achilles Heel of Uniswap V3. Also, with the introduction of Synths, THORchain LP-ers can mint synthetics against their liquidity positions which can always be redeemed for the underlying. With this innovation, LP-ers do not have to withdraw liquidity to assess liquid funds.

Retention

Next, we will look at how the retention rate of THORchain LP-ers. To do that we have to define who LPs who are currently providing liquidity are. LP-ers currently providing liquidity, in the context of our research, refers to LP-ers that have added liquidity in the last 30 days.

So looking at the donut chart above, we can see that out of the total number of LP-ers who have ever provided liquidity, about 26.6% have provided more liquidity in the past 30 days.

If we look at LP-er who has provided liquidity of at least $10,000, we can see that the story is not quite different. 20.2% of those LP-ers have added liquidity in the last 30 days.

I believe that looking at the numbers of LP-ers entering the pools on THORchain, there should be no concern about retention. As you can see, if new LP-ers are trooping in based on the incentives, existing LP-ers should know that there is no better place to invest their funds. The retention rate will improve as THORchain finds it feet in the crypto ecosystem.