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Opinion: Uniswap V3 LP is essentially shorting volatility



In the current stage of high market volatility, Uniswap V3 liquidity providers will face greater risks. Summary: The author thinks that it might be more appropriate to change the name of Uniswap V3 to Uniswap PRO. My point of view is that V3 is not an upgraded version of V2, but a completely different attempt, and the two products should exist at the same time, each occupying its own market. V3 is a very fascinating product, with some attributes similar to options, and even an "option for the seller to earn time income (Theta)". For V3, researchers suggest adding some concepts about volatility. In the second half of the article, I share some ideas for setting up V3 LP trading in the form of covered call/put options. Finally, there are some concerns about the aggregation of V3 liquidity. Uniswap V2 or the previously released Uniswap product is characterized by Pool to People or Open Finance. There is no essential difference between the user injecting 100 US dollars into the liquidity pool and the existing 1 billion US dollars in the pool. Everyone gathers into a public market-making pool. participants. All funds are used with exactly the same efficiency, solving the problem that long-tail assets can be exchanged for assets as long as there is a quotation. Opinion: Gold can hedge the risk of cryptocurrency price fluctuations: News on February 14, Sandeep Biswas, CEO of Melbourne-based Newcrest Mining Ltd., said in an interview with Bloomberg TV that encryption The asset boom justified the need for a larger gold and silver portfolio. Biswas said that gold can be used as a hedge against the risk of cryptocurrency price fluctuations. Biswa dismissed arguments that crypto assets would undercut gold's appeal, saying the latter is good for investors due to its stability. (cryptoglobe) [2021/2/14 19:44:16] The liquidity aggregation design of V3 is completely different, and the liquidity provision certificate has been changed to NFT Token. The reason is that the market-making intervals set by each LP are different. target. As a result, the width of different intervals is different, and the efficiency of capital use is different. From the starting point, V2 is to provide whether the long-tail market can be exchanged, while V3 is more professional in pursuit of professional products that improve the efficiency of capital use and lower slippage for head transactions with sufficient liquidity. Therefore, the author believes that V2 and V3 are two products with different positioning, and they will continue to run in parallel to occupy different product positioning on DEFI rather than upgrading and replacing. Most of the views have stopped at discussing the quantitative characteristics of V3. Based on the previously shared views, this article will further discuss the relationship between V3 and volatility, as well as the views of market games. As we all know, V3 replaced V2 with a range of liquidity aggregation, and the process of running out of the setting range in the process of non-stop random fluctuations in prices will suffer greater free losses, as shown in the figure below. Opinion: Visa and others suspend services for Pornhub XVG may rise again: According to news on December 12, adult entertainment giant Pornhub confirmed this week that payment providers Visa and MasterCard no longer serve it, and the site is now forced to rely entirely on cryptocurrency payments. Pornhub currently accepts Bitcoin and Litecoin, while also allowing the use of a small number of other altcoins. For example, Pornhub has been accepting Verge since 2018. Analysis pointed out that Verge (XVG), known for its relationship with the industry, may now rise again . (cointelegraph) [2020/12/13 15:01:23] The blue is the V3 interval curve, and the green is the V2 curve. So in essence, V3 is to compress the tolerance range of price fluctuations and reduce the use of funds obtained from the liquidity division interval Enhanced efficiency. As shown in the figure above, the liquidity segment of the USDC/ETH trading pair V3: most of them are gathered in the middle, which indeed shows the characteristic that the liquidity is gathered around the market price. It reflects that V3 lost its resistance to price fluctuations in exchange for capital utilization efficiency. Opinion: Visa and others suspend payments for Pornhub, which is good for encrypted assets: According to news on December 11, Mastercard and Visa have followed PayPal's footsteps and suspended payment support for the adult website Pornhub. Some analysts believe that, in fact, this provides an important opportunity for the mass adoption of encrypted assets. In September, Pornhub announced that it supports BTC and LTC payments. (Crypto Potato) [2020/12/11 14:57:21] In other words, V3 is essentially empty fluctuations in exchange for more royalties. Similar to option products, you can get a premium by selling volatility. As the price fluctuates randomly, the transaction price gradually goes out of the set range, which will gradually increase the free loss and even make the trading pair only have one currency left. How to deal with it? Option sellers (market makers) generally perform dynamic hedging of their positions——with the price fluctuating, hedging back to close to a neutral exposure. V3’s option-like dynamic hedging is to keep following the price to adjust the LP NFT range. Since each adjustment of LP NFT interaction on Ethereum requires a handling fee, the more LP NFT adjustments is not the better, then the optimal frequency of adjusting LP NFT lies in the V3 market-making fee income and real-time price fluctuations (free loss size) Balance between the three and GAS fees. Assuming that the V3 fee income is fixed, the higher the gas fee, the less the number of adjustments, the better, and the greater the price fluctuation, the more adjustments, the better. Therefore, the adjustment frequency and size of LP NFT depends on the balance between price fluctuations and GAS costs of. In fact, GAS mainly changes with the fluctuation of ETH price. Although there are two dimensions of control, the balance of frequency and granularity, it is mainly affected by the volatility of ETH. Non-ETH trading pairs also need to additionally consider the exposure to the impact of ETH price fluctuations on GAS. Opinion: The stock market will correct in the next two to three months, or lead to a sharp correction in Bitcoin prices: According to Vlad Antonov, a data analyst at Santiment, the positive correlation between Bitcoin and stocks is growing, which may eventually lead to a market crash . Antonov explained that PayPal’s announcement to provide Bitcoin services is the main catalyst for the current Bitcoin price rally above $15,000. However, the continued price increase can be largely attributed to Bitcoin’s correlation with the stock market. He noted that there is a growing gap between daily active-zce addresses and price. Antonov called this a wake-up call for a bear market pullback. While it is impossible to predict when it will happen, this high divergence points to a severe and swift correction in the market, he said. Vlad Antonov said that the market's positive response to the new crown vaccine trial and Joe Biden's successful presidential campaign are boosting the price of Bitcoin. He concluded by predicting that the stock market will undergo a correction in the next two to three months, which will cause the price of Bitcoin to drop by a quarter or more. (Crypto globe) [2020/11/20 21:31:31] It can be seen from the above that the selection of the adjustment plan is still the source’s prediction of the (future) price volatility of the trading pair. In addition to the quantitative method of financial engineering to predict volatility (not expanded here), it is also possible to subjectively judge the short-term volatility. For example, recently ETH has dropped from about 4,000 to 3,000 US dollars. At this time, if I assume that the author subjectively judges that it will fluctuate between small groups when it is around 3,000, this is actually my subjective prediction that the short-term volatility will return/decrease in the future. I choose to set it at 3,000-3,500 after it falls. The market-making range between them. If the market is consistent with the author's assumption of subjective timing judgment, this assumption will get the benefits of doing things in this range. Opinion: To be optimistic about the development of Bitcoin mining in the long run, you must choose a high-quality platform: at 14:30 on the 29th, the fifth AMA live room of XBIT was broadcast, and Cao Fei, CEO of Huobi Mining Pool, Jiang Zhuoer, founder of LeBit, and f2pool Yuchi were invited. COO Big Fish, Wu Haoran, Vice President of Hummingbird Mining Machine, and four guests discussed the shortest way to mine at present. Big Fish said that when choosing cloud computing power or hosting mode for mining, investors should consider the scale of the platform and the payback cycle. Jiang Zhuoer believes that mining must hoard coins, and if you buy a mining machine to mine and finally take the legal currency, it is a stupid act of buying a pile and returning the pearl. When the halving encounters a wet season and the mining industry is in a complex situation, Cao Fei believes that risk control is very important. New miners should do their own risk control, and old miners should choose suitable models. On this point, Wu Haoran also agreed that "investors entering the market this year are more than usual, and the payback period is longer. They should keep cash flow well and do a good job in risk management. It is not recommended to invest blindly to make big gains." [2020/4/30] This leads to another point of view of the author: V3 LP hedging scheme: Quantitative volatility prediction and subjective LP concept of opportunity selection. This is a new concept that does not exist in static market making in V2, and both of these methods are in Alpha, and each team has a different opinion on the solution. So the author thinks that V3 is the first shot of the subjective initiative Alpha income, which is like the static of the giant whale. Through the efforts of oneself or the team, one can increase one's own Alpha income, and enhancing the utilization rate of funds is equivalent to getting a leverage to V3. In this way, projects based on the upper layer of V3 are quantitative services or subjective transaction services rather than smart pools, and even run counter to the concept of smart pools. In addition, the author thinks that V3-based service provider projects will have an advantage for the time being with a team with options experience, and projects like Charm are also paying close attention. The concept of Opportunity LP was mentioned above, let’s demonstrate the application strategy of Opportunity LP below. Let me briefly explain first, a covered call option is a combination of having a spot in hand, plus setting a target price to sell (buy) options. For example, I have 1ETH and want to sell it at 4500USD. Then I get 4500USD plus sell 4500USD calls. When the price reaches 4,500 or higher, the buyer will take away my ETH, and my income is 4,500USD+the option premium for selling. Got some yield enhancements for the buy price where the plan was 4500. It can be operated on V3, assuming that the current market price of ETH is 3,500 US dollars, I want to sell ETH at 4,500 US dollars, and I set the trading pair to be higher than the market price of 3,500 US dollars, such as 4250-4750 range. In this way, you only need to put in ETH. When the price fluctuates in the range of 4250-4750, you can get market-making benefits, and when the price is higher than 4250, ETH starts to be sold until it is sold out at 4750. (At this time, the average selling price is about 4,500, which is not very rigorously calculated.) The income should always be about 4,500 US dollars per side + market-making income. (here you can narrow the range of market making to be closer to 4500) reach the predetermined stop profit target and then take out the US dollar LP. The bottom-buying and selling strategy can be analogized as follows to show the buying strategy of about 2500 to 3000 US dollars around 2750. It is not repeated here. It is worth noting that try to think about your subjective expectations before injecting liquidity, and make a trading plan to avoid blindly injecting liquidity. It mainly comes from the game of the counterparty in the market. See the figure below, we can see that the depth is completely distributed on the right side of the market price. From this, it is inferred that either a large number of LPs have not had time to exchange and remain in the previous range of around 4000, or there are a large number of LP holders who believe that the price will return to around 4000. The latter speculation is the opportunistic LP behavior of subjective volatility judgment mentioned above. Looking forward to the gradual maturity of V3 LP market-making participants in the later period, it is speculated that the future LP depth distribution will show a situation similar to option positions, that is, most of the current market participates in price judgments. At the same time, the author’s concerns are also raised here. From the perspective of free game conditions, due to the free and open market, there will be irrational behaviors such as extremely narrowing the price range and only considering the market-making income without considering the volatility. Some participants who don't understand V3 features need to avoid being led to wrong judgments by such blind behavior. Regarding the innovative liquidity aggregation of V3, the current feature that the main liquidity of V3 is gathered in the market is very similar to the market-making situation of CEX. At this time, if there is a large fluctuation that impacts the market and eats up liquidity or LP risk control chooses an opportunity, there may be a greater price slippage or stampede than V2. Perhaps V3 is more suitable for the almost cost-free LP adjustment interaction on Layer 2. It will be another scene to achieve the market-making price reaction speed of centralized exchanges. Supplement: The price of ETH fluctuated around US$3,000-4,000 when coin holders completed the first draft, and it has fallen below US$3,000 before publishing. The market is currently in a period of very high volatility. Liquidity providers participating in V3 should always pay attention to changes in volatility to avoid losses. Uniswap V3 demonstrates the leading innovation capabilities of the Uniswap team and the infinite vitality of DeFi. In the open and free DeFi, the Alpha income brought by V3 will be the salary to subvert the static income of whales, leading scientists and market makers to continuously optimize and create better income efficiency. Looking forward to the future, attempts in different directions such as DeFi-based risk control, fixed interest rate and tiered funds will give DeFi different Alpha and Beta income tracks. There will be choices of different risk and return ratios on DeFi, and the era of "eating from the same pot" will change.


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