1/
Uniswap v3 provides the only possible "solution" to impermanent loss and price impact
It also lets you reduce total price risk while increasing your impermanent loss (relative to v2) with concentrated liquidity
This might need a blogpost but I'll try a long thread first
Uniswap v3 provides the only possible "solution" to impermanent loss and price impact
It also lets you reduce total price risk while increasing your impermanent loss (relative to v2) with concentrated liquidity
This might need a blogpost but I'll try a long thread first
2/
"Impermanent loss" (IL) refers to the fact that if you sell a token before it rises in value it would have been better to hold it and sell more at the higher price
Similarly, if you buy a token and it drops in value it would also have been better to hold
"Impermanent loss" (IL) refers to the fact that if you sell a token before it rises in value it would have been better to hold it and sell more at the higher price
Similarly, if you buy a token and it drops in value it would also have been better to hold
3/
The "impermanent" part refers to the fact that if you sell a token and it rises in value you, but buy it back as it falls in value you are back to where you started
IL is only "impermanent" if prices eventually revert to where they started. Then all fees are pure profit
The "impermanent" part refers to the fact that if you sell a token and it rises in value you, but buy it back as it falls in value you are back to where you started
IL is only "impermanent" if prices eventually revert to where they started. Then all fees are pure profit
4/
"price impact" is often mistakenly called "slippage"
Price impact refers to how much a trade moves the market price, based on the depth of the market
(slippage is the difference between what you expect to get vs what you actually get due to other trades executing first)
"price impact" is often mistakenly called "slippage"
Price impact refers to how much a trade moves the market price, based on the depth of the market
(slippage is the difference between what you expect to get vs what you actually get due to other trades executing first)
5/
Put simply, a higher price impact means getting a worse rate than the market price due to lack of liquidity at that price
So, to tie it all together - "price impact" and "impermanent loss" exist in direct opposition to each other
Put simply, a higher price impact means getting a worse rate than the market price due to lack of liquidity at that price
So, to tie it all together - "price impact" and "impermanent loss" exist in direct opposition to each other
6/
The more an LP is willing to sell close to the market price the more imp loss they experience
The less LPs are willing to sell close to the market price, the worse rates (higher price impacts) traders experience
There is an iron-law tradeoff between the two
The more an LP is willing to sell close to the market price the more imp loss they experience
The less LPs are willing to sell close to the market price, the worse rates (higher price impacts) traders experience
There is an iron-law tradeoff between the two
7/
An LPs only job is to sell tokens close to the market price, this is why they earn fees
The better rates they offer, the more volume they receive, the more fees they earn
It is quite literally impossible for LPs to offer traders better rates without taking on more IL
An LPs only job is to sell tokens close to the market price, this is why they earn fees
The better rates they offer, the more volume they receive, the more fees they earn
It is quite literally impossible for LPs to offer traders better rates without taking on more IL
8/
Concentrated liquidity solves this problem the only way direct tradeoffs can be solved: exposing the tradeoff spectrum to users
LPs can choose for themselves how much liquidity they want to create close to the market price, by increasing the concentration of their liquidity
Concentrated liquidity solves this problem the only way direct tradeoffs can be solved: exposing the tradeoff spectrum to users
LPs can choose for themselves how much liquidity they want to create close to the market price, by increasing the concentration of their liquidity
9/
There is no free lunch. Higher risk / higher return. The more concentrated your liquidity, the higher your fees, the more IL you experience.
"But Hayden you said it is possible to reduce total price risk while increasing impermanent loss"
There is no free lunch. Higher risk / higher return. The more concentrated your liquidity, the higher your fees, the more IL you experience.
"But Hayden you said it is possible to reduce total price risk while increasing impermanent loss"
10/
This holds true and is part of why Uniswap v3 is the best AMM ever designed :)
IL is price risk related to tokens you end up selling.
But there is another type of price risk in AMMs: inventory risk
This holds true and is part of why Uniswap v3 is the best AMM ever designed :)
IL is price risk related to tokens you end up selling.
But there is another type of price risk in AMMs: inventory risk
11/
Inventory risk is price risk you take on by holding less of your wealth in your preferred store of value
If you prefer ETH, the more DAI you hold the greater your inventory risk
If you prefer DAI, the more ETH you hold the greater your inventory risk
Inventory risk is price risk you take on by holding less of your wealth in your preferred store of value
If you prefer ETH, the more DAI you hold the greater your inventory risk
If you prefer DAI, the more ETH you hold the greater your inventory risk
12/
Or you could be a DAI/ETH LPs who's preferred store of value is leveraged SOCKS and any unnecessary DAI or ETH held in reserve increases your inventory risk
Inventory risk is often far worse for LPs than impermanent loss
Or you could be a DAI/ETH LPs who's preferred store of value is leveraged SOCKS and any unnecessary DAI or ETH held in reserve increases your inventory risk
Inventory risk is often far worse for LPs than impermanent loss
13/
Example: You provide $1000 liquidity to Uniswap v2 ETH/USDC (50% ETH, 50% DAI) when the price of ETH is $1500
This means you put up $500 of DAI to buy ETH as it calls from the current price to 0 and $500 of ETH to sell from the current price to infinity
Example: You provide $1000 liquidity to Uniswap v2 ETH/USDC (50% ETH, 50% DAI) when the price of ETH is $1500
This means you put up $500 of DAI to buy ETH as it calls from the current price to 0 and $500 of ETH to sell from the current price to infinity
14/
If ETH doubles in value from $1500 to $3000, your main problem isn't impermanent loss from selling some of your ETH for USDC on the way up.
Your main problem is you were holding 50% of your inventory in USDC reserved for buying ETH below $1000
If ETH doubles in value from $1500 to $3000, your main problem isn't impermanent loss from selling some of your ETH for USDC on the way up.
Your main problem is you were holding 50% of your inventory in USDC reserved for buying ETH below $1000
15/
If the USDC reserved for buying ETH below $1500 was held in your wallet as ETH it would have 2x'd in value and you would not have lost out on any trading fees
The IL from this price move was 5.6%. The downside for not holding more ETH was losing a 2x on 50% of your capital
If the USDC reserved for buying ETH below $1500 was held in your wallet as ETH it would have 2x'd in value and you would not have lost out on any trading fees
The IL from this price move was 5.6%. The downside for not holding more ETH was losing a 2x on 50% of your capital
16/
Of course ETH could have gone down, in which case the opposite position would have been better.
The point is, by allowing you to provide liquidity to custom price ranges, concentrated liquidity provision lets you significantly increase exposure to preferred assets
Of course ETH could have gone down, in which case the opposite position would have been better.
The point is, by allowing you to provide liquidity to custom price ranges, concentrated liquidity provision lets you significantly increase exposure to preferred assets
17/
I hope this helps explain why concentrated liquidity is such a powerful feature.
There is no single right way to provide liquidity - it simple depends on your risk tolerance, your asset preference, and your expectations of future price movements
I hope this helps explain why concentrated liquidity is such a powerful feature.
There is no single right way to provide liquidity - it simple depends on your risk tolerance, your asset preference, and your expectations of future price movements
18/
Exposing these tradeoffs, and allowing LPs to choose for themselves, is the only way to increase the efficiency and usefulness of AMMs
Uniswap v3 does this, making it the most efficient AMM ever designed 🚀
Exposing these tradeoffs, and allowing LPs to choose for themselves, is the only way to increase the efficiency and usefulness of AMMs
Uniswap v3 does this, making it the most efficient AMM ever designed 🚀
19/
There is a lot to unpack with v3. Will do my best to continue putting out educational content.
Also happy to answer any questions people have.
Thanks for coming to my T̶E̶D̶ ̶t̶a̶l̶k̶ SBF length twitter thread.
There is a lot to unpack with v3. Will do my best to continue putting out educational content.
Also happy to answer any questions people have.
Thanks for coming to my T̶E̶D̶ ̶t̶a̶l̶k̶ SBF length twitter thread.
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