Volume in LSTR and SURGE Uniswap Pool Appears to Be Synthetic and Generated by Market Makers

I noticed a LeoStrategy post titled "LEO Ecosystem Liquidity Pools Are Paying 356.81% How We're Doing It", and the phrasing caught my eye. High APRs on a new token suggests a high volume of trading on a relatively constrained liquidity pool.

356.81% APR sounds impressive. Trade volume and price change drives APR in liquidity pools. We can examine other UniSwap pools where the ETH/LSTR pool is hosted. At the time the pools were checked ASTER/USDT was the highest APR pool, LSTR was likely not shown in this particular list because of the relative size of the pool. Looking at the chart we can the liquidity pair, the UniSwap protocol version, Fee Tier for swaps in the pools, total value locked (TVL), the current APR of the pool, and volume information. For the top two pools we can observe that the one day volume ratio is very high for the top two pools. For the top pair 95% of the value was traded in the past 24-hours, for the second ranked pool it was 188%.

Reported APR for liquidity pools, changes constantly with the volume and respective price movements of the assets. When you see a particularly high APR for a liquidity pool you should understand that it is almost always a temporary or transitory state.

Examining the ETH/LSTR liquidity pool we can observe a few things. At the time this post was written the reported APR was 370.96% and the pool volume over the past week was ~$1,600. The 24-hour volume was reported at $1,300. This liquidity pool is new, and so it's not anomalous that most of the volume is recent.

Where is that trading volume coming from? Examining the transaction data all of the recent transactions have been generated from exactly one (1) address. This is likely a LeoStrategy account that is being used to generate trade volume, and potentially harvest value through the difference in pool values. The post title then is incidentally honest, in this pool at least the APR is substantially generated by the market maker purchases.

Recall that APR is a function of fees and the value of the underlying assets. If additional investors double the amount of assets deposited in the pool, then the APR will be halved. There is currently not a large amount of assets deposited in the pool so relatively modest trade volume, from one account can produce a temporarily high APR.

How many different wallets current hold BASE denominated LSTR? The token explorer BASEscan, indicated a total of 12 unique wallets holding LSTR. Five (5) of those wallet addresses are associated with protocols or contract, one (1) of those appears to be master liquidity account, so that leaves effectively six (6) holders of LSTR. Three (3) of those accounts held less than 3.0 LSTR combined. Ownership of LSTR on BASE is currently narrow, and highly concentrated. That does not infer anything nefarious, rather LSTR is a very new asset outside of HIVE and not widely known.

It is important to read the "fine print" when someone is attempting to sell their token or product. LeoStrategy's approach is novel, and they may be able to generate sustained value of their tokens, and LEO if they are are able to attract a wider audience. LeoStrategy can be absolutely criticized for the lack of clarity in their communications and documentation, for extreme hyperbolic marketing language, and for the opacity in their operating structure.

At the time of publication Leostrategy had no visible hardcoded governance mechanisms.