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Top Market Makers Review Uniswap V3: What Factors Sustain Effective Market Making Strategies in V3?



Compared with V2, Uniswap V3 market making requires finer adjustments and higher frequency of intervention. This also means that through parameter adjustment, Uniswap V3 can create more complex market-making strategies. Uniswap V3 innovatively introduces aggregated liquidity within a custom price range, as well as multiple fee levels, so that market makers can adopt more complex strategies to actively manage liquidity and obtain higher capital efficiency. But at the same time, market makers will also face more risk types. This article will discuss a variety of factors that affect liquidity provision strategies, such as (1) the impact of the volatility of trading pairs on the selection of price ranges; (2) the frequency and cost of periodic liquidity resets; (3) untimely liquidity (4) Hedging strategy for impermanent loss (IL). Through quantitative analysis and simplified simulation, this paper will give reference opinions so that market makers can specify their own optimal market-making strategies. On May 5, Uniswap V3 was deployed to the Ethereum mainnet. As of the writing of this article (1240 Beijing time on May 7, 2021), its total locked value (TVL) has reached 367.59 million US dollars, and the 24-hour transaction volume is 226.69 million US dollars, compared with V2 (TVL 79.1 billion US dollars, 24-hour trading 11.3 billion U.S. dollars), not in the same order of magnitude. But the transaction volume/total locked position ratio is relatively higher. The centralized liquidity of Uniswap v3 brings better capital efficiency, but it also carries new types of risks if it is not well managed. This report guides readers through several important factors that liquidity providers (LPs) should consider when determining their investment strategy. These factors mainly include: Currency price volatility Price optional range for providing liquidity Gas cost and liquidity reconfiguration frequency This article will also use some simple simulations to quantify the impact of the above factors on costs, price risk and impermanent loss. In Uniswap V3, transaction fees and price ranges are parameters that LPs must specify, as shown in the user UI panel below. Justin Sun: Regarding the baseless rumors spread by foreign media, we have hired a top American law firm to pursue their legal responsibilities: According to the latest news, Justin Sun stated on his social media platform: “As Grenada’s ambassador to the WTO, I attach great importance to compliance, Compliance is the lifeline, and we maintain good relations with regulatory agencies in various countries (including China and the United States) to jointly promote the compliance and development of the blockchain industry. We have hired top US law firms to pursue their legal responsibilities for foreign media's bottomless rumors "[2022/3/10 13:48:44] Figure 1 Liquidity Position UI panelLP must choose transaction fees carefully. If there is no transaction pool with a corresponding transaction fee, then it will create a new transaction pool, which consumes a lot of gas (50 gwei, or about $1000). The rest of this paper will focus on how to optimize these two parameters to maximize LP fee revenue while reducing token price risk and impermanent loss. Why is the currency price fluctuation of the currency pair in the fund pool so important? Since liquidity is only active-zce within the specified range and earns transaction fees, if the transaction price remains within this range, it will maximize the trader's income. For currency pairs that are more volatile, traders need to specify a larger range. But assuming that the amount of capital is equal, when the trader expands the specified price range, the capital density in the range will be diluted, resulting in a reduction in the proportion of transaction costs allocated to the trader. Therefore, there needs to be a certain balance between price span and concentration, which depends on the volatility of the currency pair. Two types of volatility are discussed here: Expected volatility, which determines the actual and realized volatility in the market for the price range to be specified, which determines the transaction fee allocated to traders. A trader's personal expected level of volatility to ensure that 90% of the time (confidence level), assuming the price series conforms to a normal distribution, the price will be within the set range. This paper only considers random changes and does not consider the upward trend of prices. Sales of NBA Top Shot Top Collection exceeded $50 million in one week: The sales of NBA Top Shot top collection exceeded $50 million in one week, continuing to maintain rapid growth. In the past week, NBA Top Shot attracted 33,000 new users and completed approximately 475,000 transactions. According to CryptoSlam, NBA Top Shot sales totaled $106.3 million over the past 30 days, a 1,129 percent increase compared to the previous 30 days. Among them, Zion Williamson and LeBron James Moments, the transaction price is 100,000 US dollars. (Flow Official Flow Chain) [2021/2/22 17:40:46] As time changes, the actual realized volatility may be greater or smaller, resulting in the total transaction amount occurring within the specified range The proportions vary. Here this article assumes that at all different prices, the transaction volume is the same. Liquidity density is defined as follows: where ∆x and ∆y are the number of ABC and USDT tokens invested in liquidity. Of particular note is that this liquidity is not denominated in U.S. dollars. Since there are other LPs in the same range, the trader can earn transaction fees only for a fraction of the total trades that occur in that range, depending on the trader's liquidity weight. This article uses the following configuration parameters: Figure 2 Figure 2 Configuration Parameters Over the past year, top lending service providers have seen an average growth of over 700% in BTC total managed assets: According to news on December 28, Bitcoin lending services are growing rapidly. Data shows that in the past year, the custody assets of the top three virtual currency lending service providers BlockFi, Nexo and Celsius Network increased by an average of 734% year-on-year. (CoinPost) [2020/12/28 15:50:54] Assuming that the realized volatility remains at the same level, the corresponding set price ranges can earn the following fees: Figure 3 Earned Fees With Different Price Ranges Comparing fees with expected volatility: Figure 4 Earned Fees With Different Relative Price Range Width can observe such a trend: when the expected volatility is higher than the actual volatility, the specified price range will widen unnecessarily, thus Resulting in lower fees collected and lower capital efficiency. Depending on market conditions, the transaction price may sooner or later exceed the liquidity range set by the trader. Here, various strategies can be used to reconfigure the liquidity range: choose to wait for the price to recover within the range, or change the range boundaries as soon as the price reaches the range, or even reconfigure more aggressively even when the price does not deviate from the range position,. In order to analyze the impact of gas costs when reconfiguring the liquidity range, this paper uses a simple strategy: once the price reaches either boundary, reconfigure the position. The liquidity reset operation is performed in two steps: Delete old positions and add new positions Each step costs 350k Gas. So the cost is 350000 * 2 * 40 * 10−8 = 0.028 ETH, which is about $100. (The cost of gas consumed will vary depending on whether this is the first minting pool, and many other factors.) News | Metaverse DNA receives strategic investment from Keyin Capital to build the world's top public chain ecology: According to Metaverse DNA disclosed for the first time that in the past period of time, Metaverse DNA has obtained a strategic investment from a well-known investment institution, Collin Capital. Collin Capital will provide in-depth support in various aspects such as community, technology, and market. Metaverse DNA is a top-level public chain project developed by the Metaverse team led by the Polkadot wallet development team and the BitShares (BTS) technical team. Established in 2015, Collinstar Capital is the only investment company in Australia with a blockchain digital currency venture capital license. It is an asset management company specializing in blockchain industry investment and consulting, and its business covers blockchain infrastructure. , investment and consulting, mining machine sales, mining third-party services, independent chip design and research and development, mining pool development, digital asset management, technology research and development, etc., is a pioneering practice enterprise based on the world's blockchain, and it is also a Nova Club investment Founding member of the Consortium of Institutions. [2020/2/20] Assuming that the price sequence of the ABC/USDT trading pair follows the Arithmetic Brownian Movement: A trend factor must be added here (instead of only considering random changes in the following sections), because if there is no unilateral trend factor, Then the expectation of first realization time will be unbounded (instead infinite). In arithmetic Brownian motion, a translation (trend) constant of 1.5% is assumed, equal to the daily rate of return of the currency pair. The average time to first realization for a given price range can be obtained according to the following equation: To calculate the cost of position resets, we use this formula: Dynamic | National blockchain top expert Chen Chun will attend the Fudan Summit Forum with GoWithMi Ren Yi: On the afternoon of October 24th, Chen Chun, a professor of Zhejiang University and an academician of the Chinese Academy of Engineering, explained the "Current Status and Trend of Blockchain Technology Development" to the Political Bureau of the Central Committee in a study hosted by Chairman Xi Jinping. Affected by this, BTC has risen the most since last night. Nearly 40%, for a while, Chen Chun became the focus of various media scrambling to report. It is understood that Chen Chun will attend the Fudan University Summit Forum together with Ren Yi, CTO of the distributed map project GoWithMi, in November. According to public information, Chen Chun serves as a doctoral supervisor at Zhejiang University, chief scientist of the National Digital Printing Engineering Technology Research Center, a member of the National New Generation Artificial Intelligence Strategy Advisory Committee, and holds shares in four companies under his name. Zeng led the team to develop and complete a number of engineering systems such as "computer silk printing and dyeing pattern design, color separation processing and plate making automation system", big data real-time intelligent analysis and processing platform "Liucube". [2019/10/26] Figure 5 Profit With Different Relative Range Width Considered Relocation Cost Draw a curve with cost deduction (red) and fee income curve (blue): Figure 6 Profit With Different Relative Range Width Considered Relocation Cost when the price When the range is wider, frequent adjustments are not required. On the other hand, a narrower price range yields more transaction fee income, but the replacement cost will also be higher. In the previous V2 version, there was no need for active-zce management of liquidity positions, so it was very convenient for retail investors to manually operate at a lower frequency through the Uniswap UI. However, in V3, if the trader's liquidity position is not adjusted regularly, it will not bring the ideal rate of return to the trader. In the previous section this article used a reset strategy that is triggered once the price breaks through either boundary of the range. So, if the position is not adjusted in time, to what extent will the trader's income be affected? In the above section, when the position is close to the current transaction price, the expected transaction fee income is obtained on the first day. Calculated in units of 1 day, but can also be converted to a continuous-time model using ensemble. Starting the next day, if no previous resets have been made, the overall volatility will increase over time. So on day 2, the amount traded in the interval specified at the beginning will be reduced, resulting in less fees earned compared to day 1. Calculate the comparison between the expected income of transaction fees on the second day and the actual yield on the second day, and the comparison between the expected income on the first day and the actual income, and find the decline in actual income: Figure 7 Yield Drops When Relocation Delayed With Different Relative Range Width it can be observed that when the price range is narrower, it is more affected by delayed resets. A 1-day delay in position resetting can cause a trader's profits to drop by as much as 20%~30%. Therefore, this article recommends the use of algorithms to monitor and control traders' liquidity positions on V3 to avoid delays in position resizing, especially for those who set narrow ranges to use funds more efficiently. Impermanent losses are present in any automated market maker (AMM), but in V3, the impact of impermanent losses is magnified due to the concentration of capital in a smaller range. In the following sections, this article attempts to model impermanent losses based on changes in transaction prices (denominated in USDT or ABC). The parameters are configured as follows: Figure 8 Configuration Parameters When the price of ABC rises, the ABC in the fund pool will gradually be converted to USDT until there is no longer any ABC in the trader's position. In this case, the trader is actually long ABC, in order to hedge the risk, the trader can short 1 ABC from the beginning. In this way, the entire portfolio will be (1) the position in the pool + (2) 1 ABC's short hedge Figure 9 Impermanent Loss When Price Changes Using USDT as Unit Currency For this portfolio, when the price returns to the initial price, the value will be maximize. If the price breaks the border, there may be an impermanent loss of about 2.5%.


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