A Decentralized exchange on a DPOS chain versus a POW chain
#DPOS "Delegated Proof of Stake" versus #POW "Proof of Work" as the blockchain for a decentralized exchange
Today I was contemplating the difference in profits for Liquidity Providers between a Decentralized Exchange on a DPOS chain with fast free transactions and no miners fee to inflate the transaction fees, versus the same decentralized exchange on a POW chain with higher transaction fees due to miners fees.
I have recently experienced being a Liquidity Provider on each and wanted to share my experiences and conclusions. While I should preface these remarks with the following: these are the experiences of a singular trader, trading a limited amount of capitol, I think there are some still valid observations for me to share.
These blockchains provide fast free transactions, as advertised, so for the trader they are a preferred platform.
There seems to be a limited number of high profile or high market cap coins available on the platforms I used.
For the Liquidity provider, lower transaction fees meant smaller profits for Liquidity Providers, which didn't appear to justify the risk of impermanent loss and the risk of total loss of capitol due to scams or hacks.
For these Liquidity Pools top to be profitable for Liquidity Providers the wrapped token creators will need to provide rewards or incentives to Liquidity Providers.
These Liquidity Pools provide a larger variety of top market cap coins.
These Liquidity Pools charge higher transactions fees to traders, so the profits to Liquidity Pool providers are higher.
These Liquidity Pools charge higher transactions to traders, so they increase the costs, thus lower the profits of trading tokens.
These Pools are on slower, older blockchains, so transactions are slower then faster and newer DPOS blockchains.
These are preferred places to trade, but if hardware fixes or software fixes could increase speeds and if mining fees can be lowered in exchange perhaps for increased volume the cost to traders would be lowered , while maintaining income to miners and increasing profits for traders.
Specific Recommendations for DPOS project creators
I think you need more support from Steem whales in this Liquidity Pool. They need to inject enough capitol into this pool to increase its volume to at least 400,000 USD, most pools with 1,000,000 USD are generating small transaction fees on the DPOS blockchain Tron. While the amount of Steem traded for wrapped Steem supplied a very large amount of Steem for your curation account. The transaction fees for the Liquidity Pool with total pool value of 50-60 thousand USD were very small, and the risk of capitol loss for the Liquidity Pool investor far outweighed any profits.
Additional Observations on DPOS Pools and Recommendations
The Liquidity Pool projects on DPOS chains appear to have large rewards and larger transaction fee profits for the early investors, but not for later investors. These profits were provided mainly by Pool incentives of large initial APR offered mainly to early investors and large transaction fees earned by early investors as other investors followed them into the pools. These advantages don't exist for later Liquidity Providers. Additionally as the numbers of Liquidity Providers rose, the small profits generated by the naturally lower transaction fees of a DPOS blockchain meant that total profits available for Liquidity Providers shrank when divided amongst the increasing number of investors and the risk becomes greater than reward to a Liquidity Provider.
This isn't a criticism of the project, it is an observation of profit potential for Liquidity Providers to join early or reconsider joining unless the current profit structure changes or special incentives are provided like in the Sun Pool Tron. The special incentive of Sun tokens along with transaction fees was very profitable. But the average Liquidity Pool provides profits only through transaction fees, so the DPOS system is risky and potentially unprofitable for the Liquidity Provider.
I think a balance of incentives throughout the project to provide profits for both first and later investors would stabilize the pools better, as they tend to rise and fall in value rapidly as the investors who get in early then get out early, and late investors get in late and leave quickly as the promised profits don't materialize, but risk never ceases.