The contract provides subsidy = 5 tez * 60 s * 24 h * 365 d = 2,628,000 tez/a . Assuming efficient market and baking with 6% annual reward is the only alternative then we can expect liquidity provision of liquidity = 2,628,000 tez / 6% = 43,800,000 tez.
As long as liquidity <= 43,800,000 tez the yield for liquidity provision is higher than baking. When liquidity is very low, the yield is very high. Since subsidy happens every block there is no uncertainty about one’s yield. Pretty nice mechanism to ramp up liquidity.
Comparing this to Uniswap: Currently, the most liquid pair on Uniswap is WBTC-ETH with 280,000,000 USD of liquidity. With current tez price the estimated liquidity would be 43,800,000 tez * 2.5 USD/tez = 109,500,000 USD. So the subsidy alone won’t get us past Uniswap but will catapult us to the same magnitude. To make the comparison complete, Dexter recently hit “only” 1,000,000 USD of liquidity.
This is simplified/conservative: ignoring fee rewards for liquidity providers which should incentivise higher liquidity provision.
