I'm looking at liquidity pools (LPs), and the economics don't make sense given the APYs. How is this possible, or are exchanges simply taking a loss to establish market dominance? Please tell me if/what I'm missing.
The APYs are derived from the user swap fees from swapping tokens on a given platform, powered by an Automated Market Maker (AMM). Exchanges may also earn revenue on the price spread difference, the price difference confirmed by the user and the price at the time of execution.
Using 1inch.exchange as an example,
Sample user swap fees: 0.36%
Recent monthly trade volume: $6B
Monthly exchange revenue: $43.2M
a. Monthly swap fee revenue: $21.6M
b. Price spread revenue: $21.6M (Let's assume it's equal to the swap fee revenue to be generous)
Considering the total users' LP principal staked is $1K, given a pool like LDO-stETH (64.13% APY/5.34% monthly yield), the total user revenue is $53.44.
However, let's say the total user's LP principal staked is $1.5B. The users' revenue, $80M, is 2x the exchange's revenue, $43.2M for the month.
See the sample calculations.