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The income characteristic of Uniswap V3 LP is that under the condition of sufficient market liquidity, the current 0.05% fee rate is higher than the 0.30% fee rate LP, but in the case of lack of market liquidity, the 1.00% fee rate will produce a comparison High yield.
Original title: “Analysis of Uniswap V3 User Usage: LP’s Revenue Characteristics and LP Distribution’s Assistance to Secondary Market Transactions”
Written by: Xiaochen Lin & Jingcheng Li, FBG Capital
Uniswap V3, the head platform in DEX
Since Uniswap V3 went live in May this year, it has quickly become the leading platform in the DEX market. According to the latest CoinGecko data, in terms of transaction volume, Uniswap V3 ranks first in Dex, accounting for 18.5% of the total transaction volume.
The reason why Uniswap V3 can grow rapidly is largely because of its unique LP mechanism, which allows LP providers to set their own liquidity price range. On the one hand, this improves the utilization of funds and brings LP income that is dozens or even hundreds of times higher than that of V2. On the other hand, this mechanism also brings some changes in impermanent losses.
In this report, we analyze Uniswap V3 from two aspects:
- LP’s income characteristics
- LP distribution assists secondary market transactions
We believe that through such research, we can have a better grasp of the overall market based on the underlying data support.
A brief analysis of Uniswap V3 LP’s profit mechanism
Before discussing the above two aspects, we believe that it is necessary to do some brief analysis of Uniswap V3 LP’s revenue mechanism. Here we take the LP pool of ETH to USDT as an example. There are three LP pools in this currency pair, with fee rates of 0.05%, 0.30%, and 1.00%. These three pools are independent of each other for the LP provider. But for LP users (users who do transactions through Uniswap), they cannot directly select a certain LP pool for trading. All LP pools of the same currency pair will provide transaction liquidity as a whole.
The income of the LP is equal to = the fee rate of the LP pool * the transaction volume of the LP pool
Through this formula, under the same transaction volume, the high-rate LP pool has higher returns than the low-rate LP pool. It is easy to draw a wrong conclusion here: if you want high LP returns, the investment priority is 1.00%>0.30%>0.05%. The reason why this conclusion is wrong is that it ignores the distribution of transaction volume in LP pools with different rates. Through data research and a series of observations, we believe that under the slippage set by the user, the transaction volume will be prioritized to the low rate (0.05%) pool. If this pool is not liquid enough, the rest will then go to the medium rate (0.30). %), and finally went to the high-rate 1.00% pool. We can also see this from the above table: WETH/USDT 0.05% TVL is only about 1/6 of WETH/USDT 0.3%, but its transaction volume is almost 1.5 times the 0.30% rate. Therefore, the low-rate LP pool will “grab” the transaction volume from the high-rate LP pool.
Knowing this mechanism, we now enter the discussion of the LP’s income characteristics and the LP distribution’s assistance to secondary market transactions.
LP’s income characteristics
The main features come from the following Top 50 LP Rolling 7-day profit chart.
Feature 1: In the case of sufficient market liquidity, the current 0.05% fee rate is higher than the 0.30% fee rate of the LP
From the above figure, the physical line (0.05% ETH to the LP pool of stablecoins) is almost always on the dotted line (0.30% ETH to the LP pool of stablecoins), we can see this feature.
Through the previous allocation mechanism of Uniswap V3 transaction volume, we can know the reason: 0.05% of the pool will “grab” the transaction volume from the high-rate pool, so although the fee rate is low, the excess transaction volume will make up for it. And provide higher income. This difference in return can be seen as the risk appetite of LP providers: 0.30% of LP investors tend to be less risky or risk-neutral, so they tend to have higher fees to compensate for risks.
Feature 2: In the absence of market liquidity, a 1.00% fee rate will generate relatively high returns
This feature can be derived from the increase in revenue with the bold dashed line at the two time points marked in the figure above. These two time points correspond to the market decline after May 19 and July 19 ($1980 fell to $1730).
The reason for this phenomenon can also be explained by the above mechanism: when the price drops to a low liquidity range, the liquidity of 0.05% and 0.30% can no longer provide the required trading volume, and the 1.00% of the pool will be used Liquidity, and because the pool of 1.00% (in the ETH-to-stable currency pair) generally has a small TVL, there may be ultra-high returns in a short period of time. For example, in the fall on May 19, 1.00% of the pool The short-term income of the pool has reached an annualized 1000%+.
Through the above two characteristics, in the absence of hedging, a better LP income strategy is:
- Near the current price: Put in 0.05% to strive for higher trading volume
- A slightly wider price range for the current price: put 0.30% in, as a relatively stable (baseline) income for LP, and at the same time impermanent loss
- The price range where the current price is relatively far (large rise or fall): put in 1.00% to gain ultra-high returns under extreme market conditions
LP distribution assists secondary market transactions
Let’s discuss the second topic of this research: the assistance of LP distribution to secondary market transactions.
By capturing the underlying data, we can summarize several large LP pools of BTC/ETH against stablecoins, and summarize LP investors’ judgments on the recent price fluctuation range of BTC and ETH in the market.
From the above figure, we can conclude that the current LP provider’s judgment on the price fluctuation range of BTC/ETH
In addition, we can also see that the current 0.05% rate and 0.30% rate of ETH have basically the same distribution of funds in the LP pool of stablecoins. But 1.00% of the pool funds are relatively concentrated, mainly in the range of $1790-$1850.
At the same time, through the comparison before and after the market decline in these two days, we can also conclude that the LP provider did not adjust the position very quickly, and many positions are currently suffering relatively large impermanent losses. This can be seen from the two figures below. A comparison of two points in time can be drawn.
The picture above is July 18, the market price was $1976, and the picture below was July 20, the market price was $1739. Although the price of ETH has dropped a lot, there is still a lot of liquidity concentrated in the range of $1950-$2100. These LP providers are suffering relatively large impermanent losses (assuming they are not hedging their positions). If they decide to adjust their positions, then there will be additional selling pressure on the market.
Through the above analysis, we can see that market investors’ expectations for the range of price fluctuations will be of great help to secondary market transactions.
LP’s income characteristics
- In the case of sufficient market liquidity, the current 0.05% rate is more profitable than the 0.30% rate of LP
- In the absence of market liquidity, a 1.00% rate will generate relatively high returns
LP distribution assists secondary market transactions
- The current LP provider’s judgment on the price fluctuation range of BTC/ETH
- The current liquidity is concentrated in the range of $1950-$2100
With the latest Uniswap V3 Top 50 LP Rolling 7-day income
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