In a previous article, I explored simple and complex measurements for liquidity, the latter of which are primarily used as spread estimators for large datasets. In it, I made the incorrect claim that Market Depth couldn't be calculated with on-chain data (this was always possible and defined as Total Value Locked, but this metric became more reliable with the idea of Concentrated Liquidity AMMs popularised by Uniswap).

Shortly after that article was published, I decided to look at another governance token to gauge its liquidity in relation to other, more liquid governance tokens. My aim for this study is to use these metrics to tell a comprehensive story on token liquidity.

$HOP token was used as the subject for this study, a token primarily issued for influencing the governance of bridging protocol: Hop. I attempted to compare its liquidity to some of its competitors: Stargate ($STG) and Across ($ACX), both bridging protocols.

In addition to the simple metrics I listed in my previous article, I also used cumulative volume and "slippage" as well (which I'd class as both complex and experimental).

Slippage here is simply the disparity between the USD value of tokens swapped-in and swapped-out. It seemed reasonable to me to simplify the slippage metric by using this calculation, this should capture user-facing "spread".

The results I observed for $HOP "slippage" were very surprising, and revealed how thin liquidity is for the token, particularly on Layer-2 chains.

Of the three bridging tokens which were studied, using the "simple" metrics, it's clear that $HOP is the least liquid: Volume is very low across chains,

turnover rate is lowest amongst the three,

and while it still has a higher cumulative volume than $ACX, the latter's cumulative volume is growing exponentially, while $HOP is growing linearly. $ACX will likely catch up soon at this rate (despite $HOP being first issued 6 months prior).

Despite this, however, $HOP is the most actively traded asset amongst the three tokens

But most trades are very small

Source for all these metrics.

It should be noted that these metrics are indeed tracking "active liquidity", which should be obvious by now to readers.

TVL, meanwhile, could be a bit misleading as a metric for liquidity depending on how it is calculated since most AMMs provide liquidity for a wide range of possible valuations (for Uni-V2-based AMMs the range is (0, ∞), for Uni-V3-based AMMs it's [a, b] for some {a, b} ∈ ℝ+).

Comparing TVL for full ranges can indeed be misleading, e.g. imagine observing the historical TVL of two tokens, one declining and the other increasing overtime to some value ε. This could possibly be interpreted in two ways:

1. The declining one is becoming less liquid overtime (i.e. active tvl is decreasing) and is not compensating for the declining liquid supply while the other is increasing its liquidity in active ranges.

2. The declining one is optimising it's TVL by removing liquidity/token supply in inactive ranges/ranges anticipated to never/unlikely to ever be reached (via collection), while the other token is becoming more "optimistic"/wasteful in its liquidity deployment

The reasons outlined seem too convoluted to be reliable if not specified by the presenter of this metric. Therefore, I believe that the metrics described so far should be more reliable than a vague interpretation of the TVL metric.

Note that this is purely conjecture, and I’d love to hear any debate against this line of reasoning. But examining what ranges of liquidity are being removed/added over time seems like a very interesting idea for future studies.

When you do compare TVL in this case, however, similar conclusions can be drawn

Source: TokenTerminal

This "liquidity ranking", $STG > $ACX > $HOP, holds when comparing their TVL.

This assertion holds when comparing their slippages as well... But this is where things start to become weeeeeird.

$ACX stands in the middle of the rest, once again, in the liquidity rankings. The slippage on Optimism (blue/purple line) will become relevant below.

All $STG liquidity is deployed on Ethereum Mainnet (primarily paired with $USDC on CurveFi), and again shows that it dominates $ACX in terms of slippage. It also dominates $HOP, but $HOP's slippage metric on Optimism and Arbitrum is very sus

Why is slippage so high on Arbitrum and Optimism? The TL;DR of it is that... $HOP is very illiquid on these L2s for the demand.

Here are some of the worst offenders

It seems like just about all of these contracts deployed on Optimism are unverified, but I will not speculate on what class of contracts they are.

Instead, I show that $HOP is indeed quite popular on L2s, in fact Optimism has overtaken Ethereum Mainnet as the chain where $HOP is most frequently traded for over a year now, and Arbitrum surpassed Ethereum Mainnet since March 2024

And $HOP is indeed way above average in slippage on its two most traded DEXs on Optimism (Velodrome) and Arbitrum (Camelot)

The reason for its slippage being above average may be topic of a later post, however I hope you had as much of a fun ride as I had making this post.

Although, I do feel a sense of dissatisfaction that I haven't solved the mystery, but I suppose I'll have to leave that for a later post.