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Uniswap founder Hayden Adams shared a Uniswap V3 simulator to see its operating mechanism and expected benefits.
Original title: “Introduction to Tools | Uniswap V3 Simulator: Maximize your liquidity benefits, are you ready?” 》
Written by: Elponcho
It’s been a long time since Uniswap launched V3 on May 5th, U.S. time. The biggest change of Uniswap V3 is that it changed the original AMM model to “customized price range liquidity” similar to the order book (officially called Concentrated Liquidity).
The biggest difference from Uniswap V2 is that liquidity providers can obtain transaction fee income on a larger scale through the setting of price ranges. Officials claim that V3 can achieve a capital efficiency of up to 4,000 times.
In contrast, the setting of the price range is extremely important for the income of the commission. If the range is too wide, the transaction fee may be significantly reduced compared to V2.
This price range setting looks similar to “grid trading”, except that Uniswap V3 earns handling fees during the exchange of two tokens, while grid trading pays handling fees to centralized exchanges, and the income is Price arbitrage.
What is the actual operation of Uniswap V3’s liquidity income? Uniswap founder Hayden Adams shared a Uniswap V3 simulator, we can take a look at its operation and expected benefits.
Uniswap V3 emulator functions
Custom liquidity price range strategy
You can select trading pairs on the webpage as a simulation of the liquidity pool of V3. In the example, WETH/USDC is used as the trading pair. The investment amount is US$1,000, which means the initial investment amount is US$500 in WETH and US$500 in USDC. The current exchange rate of WETH to USDC is 3290 US dollars.
You can set two pricing ranges to compare.
In the case, the price range of Strategy 1 is narrower, and the price range of Strategy 2 is wider. The upper and lower limit of strategy 1 is 2515~4225, which means that liquidity is only provided in this range. If it exceeds WETH/USDC and exceeds 4225, then your liquidity will be fully converted to USDC, and if it is less than 2515, it will be fully converted to WETH. Strategy two also applies to the above logic.
Next, you can see how V3’s strategy one and strategy two are different from the full range of price ranges of V2.
The green line represents the change in the value of WETH/USDC liquidity in Uniswap V2. Since the value of the two tokens must be kept equal in the liquidity pool, when the price of the currency changes, the number of coins will also be adjusted accordingly. .
Due to the liquidity provided by V2, the preset price range is from infinitely small to infinitely large. When the WETH/USDC price moves, the change in the value of the asset is more favorable. Since the liquidity of WETH/USDC will not all be converted to one of them, compared with V3 strategy one and two, it is better to maintain the total asset value in the full price range.
Let’s take a look at V3’s strategy. Due to the limited price range, liquidity will be converted into one of the tokens when it is close to the upper and lower limits of the range. It can be seen that both strategies 1 and 2 are almost fully converted to USDC when the price of WETH/USDC is close to the upper limit of the range, resulting in only a slight increase in the liquidity value when WETH continues to rise. When approaching the lower limit of the interval, the logic is the same.
From the following case, when the ETH price of V2 reaches 5,000 USD, the investment of 1,000 USD will grow to 1,322.88 USD; while the blue line strategy is only worth 1064 USD.
What are the benefits of V3? As can be seen from the table on the right, due to the liquidity provider of V3, the assets will be concentrated in the price range to provide transactions; that is, the same capital investment, V3 can occupy more liquidity in the price range. Than, to receive more transaction fees.
So we can see in the simulator that the purple strategy: a narrower price range strategy has 8.22 times the fee efficiency compared to V2, and the wider blue strategy has 3.85 times the fee efficiency compared to V2 .
Comparison of fee income between V3 and V2
Another simulation result is the calculation result of estimated V2 and V3 including fee income. You can fill in “liquidity days invested”, “final currency exchange price”, “return rate of V2 handling fee on investment time”, “days fluctuating within the price range of strategy one”, “days fluctuating within the price range of strategy two” “.
In the process of testing, Chain News quoted the current V2 ETH/USDC fee annualized income of 61% to calculate, the liquidity investment days were one year, and finally ETH came to 4,000 US dollars. The price ran for 50 days in both strategies one and two.
It turns out that under the price range of V3, the income including handling fees is much higher than that of V2. However, it must be emphasized that this is only simulated data, and the actual earnings situation will still vary due to different market conditions.
Comparison of benefits under each strategy:
This simulation website has other interesting data to play with. Readers who want to put liquidity in Uniswap V3 can test it.
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