And I don’t think it’s going to be going anywhere… I’ve been doing a bunch of research into Uniswap V3 and here are my findings:
See also → Uniswap V3 — Liquidity providing fee analysis (to be posted…)
Contents
- Why should you NOT rebalance your Uniswap V3 liquidity-providing position back to a 50:50 ratio if the price pushes your position out of range?
- A dynamically rigid way of providing liquidity
- R-Reset strategies
- ETH/BTC vs ETH/stablecoin vs BTC/stablecoin
- Liquidity distribution of the value in the USDC/ETH (0.3%) pool
- Conclusion — Impermanent loss
Why should you NOT rebalance your Uniswap V3 liquidity-providing position back to a 50:50 ratio if the price pushes your position out of range?
Because you could lose money over time. When you recreate a 50/50 bin from closing a 100/0 bin that you got pushed into from price movement, assume that the price of the crypto of the “100” part of the 100/0 bin is now at equilibrium. And this is NOT true…
What you should have done here, is to create a 75/25 bin. You’re impermanent gain will be more impactful and you will be able to earn more trading fees for a larger price range than creating a 50/50 bin.
And if you keep on getting pushed out, to the lower side, you should probably just stop providing liquidity to that specific coin pair…
Ideally, you are in tune with market sentiments, can understand certain technical indicators, and are providing liquidity in a manner that caters to the intuitive understanding gained from listening to what’s happening with the markets. Easier said than done -_-
So there becomes the conversation of providing liquidity in some sort of dynamically-rigid manner:
A dynamically rigid way of providing liquidity
Create multiple liquidity-providing positions. EX:
ETH price = 4000
LP 1 = 3250–4250 (75:25)
LP 2 = 3500–4500 (50:50)
LP 3 = 3750–4750 (25:75)
As ETH price gains or declines, you will be pushed out of LP 1 or LP 3. At which point you can create a new position.
What are the downsides to this?
In one way, you can lose out on some potential trading fees APY.
How?
Because you earn greater trading fees if you provide liquidity closer to the actual price of the pair, diluting your value across multiple pools would potentially push you out of a price range, thus not earning trading fees for that bin.
But because markets are chaotic, perhaps over the long term having multiple bins would be better?
Note: it may require more capital to achieve the same amount of dollars per day as the fully concentrated position.
In the end, the way each user decides to provide liquidity will be a subjective process based on whatever strategy best suits them. And Uniswap V3 offers that much more power to the individual! Super cool.
Hey, what about Gas? You can’t do any of this unless you have like 1m+ USD
Bridge to an L2 🚀 study fees, create strategies, provide liquidity!
R-Reset strategies
A lot of this info and my further intuitions on this topic came from this paper…
“By choosing more concentrated intervals, a provider can increase their return when the price remains in the interval, but this will also increase the variance in their return. To formalize this, we model a discrete set of price bins, and a provider who chooses how much liquidity to place in each bin and when to reallocate, and who seeks to maximize its expected utility from the stream of fees implied by the adopted strategy.” — page 2
The Uniswap V3 docs touch on this concept within the “Active Liquidity” section, as well, saying:
“Importantly, LPs are free to create as many positions as they see fit, each with its own price interval. Concentrated liquidity serves as a mechanism to let the market decide what a sensible distribution of liquidity is, as rational LPs are incentivized to concentrate their liquidity while ensuring that their liquidity remains active.”
ETH/BTC vs ETH/stablecoin vs BTC/stablecoin
I personally think that the ETH/stablecoin or BTC/stablecoin pair would be the safest. You may earn less through your initial investment, due to impermanent loss, but you will earn more through trading fees APY.
Your daily return from trading fees, when providing liquidity to an ETH/stablecoin BTC/stablecoin liquidity pool will be much higher than the trading fees earned through an ETH/BTC pair. That being said, your initial capital may grow at a faster rate if you opt for an ETH/BTC pair. The reason is that they are positively correlated.
More daily fees? Or greater potential long-term value? Subjective desire nonetheless…
Liquidity distribution of the value in the USDC/ETH (0.3%) pool
Does it mean anything?
Well if eth is 3361 ^ and you are expecting it to rise, you could provide liquidity from the range of 3000–4500 for example, or even more aggressive at 3150–4500.
*Note: You would be earning more trading fees APY with the latter position because your range is smaller
Analyzing the liquidity distribution of a Uniswap V3 pool can provide insight into the sentiment of the collective decisions of those providing liquidity! Well, that’s at least how I conceptualize it.
Conclusion
Providing liquidity on a layer 2 solution, utilizing multiple price bins, and implementing an r-reset strategy of sorts, is an efficient and effective way to provide liquidity on Uniswap V3 if you have at least ~$5000 USD. There are lots of conclusions you can make from this info…
Impermanent loss tho?
IL isn’t actually that bad, depending on what you’re supplying liquidity towards. In one sense, you look at it as a trade-off, and your position becomes an average of the 2 coins you provide liquidity towards. If one skyrockets, you lose out on not having 100% of your value in that, but you gain through trading fees.
This is why people either tend for a pair that is positively correlated. Such as an ETH/BTC pair (positive since Sept 2019*). And then you won’t suffer any IL.
Impermanent loss, as a means for volatility mitigation
If one of the coins decreases in value rapidly, you won’t suffer as much value impact as you would if 100% of your value was in that coin. #volatilitymitigation
Thanks for reading :)
- Stu
DeFiKnowledge
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