Introduction

Since the launch of Uniswap v3, there exists three different fee tiers that liquidity providers can choose when providing liquidity, namely 0.05%, 0.3%%, and 1% trading fee. These trading fees are subtracted from the total swap value and added back into the pool (well, the trader actually just receives less than the actual amount, but you get the idea) to generate income for the liquidity providers, since their shares are now worth a little bit more. It may seem like 1% fee is the obvious choice when choosing fees, I mean, why choose a less % when you can theoretically earn more with a higher % right, but that isn't always the case, since less traffic, hence volume, will be routed to the pool when the fee is high, thus generating less fee overall.

This in turn sparked the interest in trying to optimize yield by choosing the optimum fees (or configuration) for the each pairing, which led to Ashwath's tweet suggesting that 0.05% fee is the best fee tier for ETH-USDC pair as the Volume/TVL is much higher than its higher fee counterparts. However, there are a couple of things I would like to add:

1. APR is a better metric to define the fee tier's performance instead of Volume/TVL as the Volume does not indicate how much fees are collected, while APR considers the actual fee collected by the pool.
2. Only 1 pairing (ETH-USDC) was used to justify his answer, which means that the sample size is too small to be meaningful.

So, what is the best fee for the liquidity pools? Let's find out.

Fee Generation Statistics

The graph below shows the total fees collected by the fee tiers since the launch of Uniswap v3 which clearly shows that 0.3% fee pools are getting a lot more love than the 0.05% and 1% pools, even until the time of writing. Contrary to what's said in Ashwath's tweet, the 0.05% pool fared the worst among the three tiers.

Other than that, only one 0.05% pool is in the all time fee generating pools, while 7 out of 10 are 0.3% fee pools. This shows that despite having a flexibility in choosing the fee tiers, the 0.3% tier is still the most popular and generates the most fees.

The difference in fee generation for the pools is even more profound when we compare the number of times the fee tiers made it to the daily top 3 fee generating pool, where the number achieved by the 0.3% pools is more than the 0.05% and the 1% pools combined. This favoritism towards the 0.3% pool can be explained by the fact that 0.3% is the only fee tier available in Uniswap v2, where the users have become comfortable with this fee tier which resulted in the unwillingness to explore outside of their comfort zone. Don't fix what's not broken right? With these facts, we can say that blindly choosing the default fee tier often will not result in significant losses in potential gain.

Naturally, when the fees collected for a pool is high, so does the TVL, as liquidity providers will change their positions to where the profits are being made. This means that the actual profit are split between more providers than the ones in the other fee tiers, which brings about the question, does higher fee generation equates to higher APR?

APRs ($100k < TVL < $10M)

So let's start with smaller pools with more than $100k TVL and less than $10M TVL. This range is chosen as less than $100k TVL may have very volatile APRs and $10M TVL seems like the perfect cutoff point before being categorized as large, since the largest pool has about $400M in liquidity. Based on the graph below, once again, the 0.05% pools are getting the short end of the stick, while 0.3% is performing quote mediocrely. The 1% pools are performing phenomenally in this range, boasting a median APR of about 50% throughout the months.

Below are the top 10 pools by APR for the current TVL range. It's seen that the 1% pools dominate this range where 10 out of 10 pools are 1% pools. Before aping into these pools though, keep in mind the the impermanent loss in these pools are far greater than the yield, despite having high APRs.

The graph below concretes the fact that 1% is the go-to fee tier for lower TVL pools, while 0.05% fee tier should be avoided at all cost, you won't be making any money AND have to suffer terrible impermanent losses.

APRs (TVL > $10M)

What about the big boys league? Is 1% still dominant here? By observing the graph below, we can see that it's definitely not the case here. While the 1% pools have some incredible APR here and there, overall, they do not yield any gains.

As the 1% pools are not performing consistently in this range, the rest of the analysis for this range excludes the 1% pools. By removing the 1% pools, we can see that the APR of the 0.3% pools is clearly higher than the 0.05% pools, once again proving that 0.3% pools will perform better than 0.05% pools most of the time. In fact, their performance is twice as much as the 0.05% pools. So yea, when in doubt, choose 0.3%, you won't be wrong most of the time.

Out of the top 10 large pools, 8 of them are 0.3% pools while 2 of them are 0.05% pools. It is noticed that the 0.05% pools are stablecoin-WETH pairs which have consistent high daily volumes. And hey, guess what, the tweet speaks the truth, the 0.05% WETH-USDC performs better than its 0.3% counterpart by about 9%.

All in all, the 0.3% fee tier is still by far the best choice for high TVL pools, despite in some cases where the APR is higher in 0.05% pools, cause the APR difference is not high enough to ponder too much about. Other than that, the 1% fee tier should be avoided at all cost for high TVL pools as most of the time, no yield will be generated.

Conclusion

The tweet is right about the complexity of Uniswap v3 for end users. However, we can simplify it one at a time by analyzing the best configurations for the pools based on past performance. In this dashboard, we analyzed the fee tier performance for small and large pools, as well as the overall fees collected by the pools. From that, we can learn a few things about the fees and the fee tiers:

1. Although a pool has high daily volumes and high daily collected fees, it does not mean that it has the best APR.
2. The best fee tier for smaller pools is 1%, while the 0.05% fee tier should be avoided.
3. The best fee tier for larger pools is 0.3%, while the 1% fee tier should be avoided.
4. The best overall fee tier is still 0.3%, with mediocre performance on smaller pools and the best performance on larger pools.
5. The top 10 ranking of each TVL range also shows that the fee tier performance is quite consistent throughout the range, where the top 10 pools are always the ones with the best fee tier for that range.
6. A lower fee tier should be used for pools with high volumes even if the pool has a high enough volume.
7. When in doubt, 0.3% is your friend.
8. High fee generation for a pool doesn't equate to high APR, the TVL is also an important factor to consider.