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4 Jun, 22 tweets, 9 min read
1) I've noticed many people think that Uniswap v3 $UNI solves the problem of impermanent loss (IL). It doesn't. Actually, it's just the opposite. Concentrated liquidity substantially increases the risk of IL. Let's quickly break down why it happens.
2) I think this common misconception may have been unwillingly originated by @haydenzadams. He wrote:

Uniswap v3 provides the only possible "solution" to impermanent loss and price impact

But he didn't use quotation mark ("solution") without a reason.
3) In fact Hayden's long thread (worth reading!) explains exactly the trade-off between IL and price impact. The "solution" he meant is that v3 offers liquidity providers (LPs) a possibility to choose their preferred level of exposure to IL.
4) Relation between concentrated liquidity and IL can be summarised by a simple rule:

The more concentrated liquidity (narrower price range), the higher risk of IL.

Why does it work this way? Let's break it down to a simple example.
5) I have 1000 USDC, ETH is at 2700$ and I consider a few options:
🟪 HODL 100% USDC - hold 1000 USDC.
🟥 HODL 100% ETH - buy ETH for 1000 USDC, hold 0.37 ETH.
🟧 HODL 50/50 - buy ETH for 500 USDC, hold 500 USDC and 0.185 ETH.

Value of my holdings vs ETH price on the graph:
6) Now let's add a new strategy which involves passive LPing in Uniswap v2:
🟩 UNI V2 - buy 0.185 ETH for 500 USDC, add 0.185 ETH and 500 USDC to liquidity pool.

The divergence between 🟩 and 🟧 on the graph represents IL.
7) 🟩 is always below 🟧 - does it mean that HODL 50/50 always outperforms UNI V2? No. The curve on the graph ignores trading fees which in real life increase value of UNI V2. If volume is high enough, trading fees can compensate IL.
8) Time to complicate things a bit. Let's add another strategy which involves concentrated liquidity in v3:
🟦 UNI V3 W (wide range) - buy 0.185 ETH for 500 USDC, add 0.185 ETH and 500 USDC to v3 for symmetrical price range +/- 1700$, i.e. 1000-4400$.

Now compare 🟦 vs 🟩 and 🟧
9) Divergence between 🟦 and 🟧 represents IL in UNI V3 W strategy. It's much bigger than IL in UNI V2 (🟩 vs 🟧). Concentrated liquidity on a relatively wide range +/- 60% of current price substantially increases risk of IL.
10) Does it mean it's inferior strategy? No. It's a different risk profile. The curves ignore trading fees which are the the main reason why LP can prefer V3 over V2. Capital efficiency (CE) of 🟦 is 3.23x higher than 🟩 which indicates more fees (depends on other LP strategies).
11) One more strategy before I come to a conclusion 😀 This time let's use a narrow range in v3:
🟪 UNI V3 N (narrow range) - buy 0.185 ETH for 500 USDC, add 0.185 ETH and 500 USDC to v3 for symmetrical price range +/- 500$, i.e. 2200-3200$.

See what happens between 🟪 and 🟦?
12) UNI V3 N 🟪 diverges from UNI V3 W 🟦 leading to higher IL. That's the confirmation of the aforementioned rule:

The more concentrated liquidity, the higher risk of IL.

Again, it doesn't mean 🟪 is worse than 🟦. It's optimized for more trading fees (CE 11.18x higher vs V2).
13) Uni V3 works this way: When price is within LP's range, they have both tokens from the pair and sell one for the other earning fees. But when price goes beyond the range, LPs are left with only one token - they sold the one which appreciated in value.
14) Uni V3 allows LPs to express their market making strategy which is a trade-off between earning opportunity and IL risk. This is a playground mostly for professionals as LPing requires active management of liquidity pools taking time, skill and money.
15) That's why I think the majority of LPs will not manage their liquidity pools themselves. They will be outperformed by automated strategies which frequently adjust relatively narrow price ranges to maximize the profits from trading fees.
16) Beta test of @VisorFinance's first strategy on ETH/USDT has already demonstrated 3x better performance than a simple passive strategy and in a long term the gap between active and passive LPing can only increase. It makes me bullish on $VISR.
17) But I'm also aware of the fact there will be more solutions for active liquidity management, more capital will compete for the same trading volume and yields will definitely settle down. IL will still haunt LPs and remain unsolved issue unless...
18) ... unless it has been already solved! I think many still underestimate the value proposition of @Bancor - dex with IL protection. With single-sided liquidity you can deposit your token into Bancor and earn trading fees while being protected from IL.
19) Bancor is a true paradise for token holders. If you are bullish on $LINK, you don't want to have less and less of it when numba goes up and this is what happens in any liquidity pool when LINK outperforms other token. Bancor fixes this and it makes me bullish on $BNT.
20) Think of Bancor as interest bearing account for token holders. It's a perfect setup for a liquidity black hole. Imagine what could happen with increased capital efficiency and higher passive yield. This may soon become reality with Bancor V3...
TL;DR:
- Uni V3 has never meant to solve IL. IL is bigger with concentrated liquidity.
- Active liquidity management will outperform passive strategies - bullish on $VISR.
- Dexes with IL protection can absorb huge TVL - bullish on $BNT.
- Not financial advice :)
Graphs I used in this thread come from defi-lab.xyz - the tool which allows you to play with different strategies for Uni V3. Thanks @DefiLab_xyz!

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More from @korpi87

korpi Profile picture
2 Jun
1) Would you take a loan with negative interest rate (you are paid for borrowing) with zero risk of liquidation? I would and I did. It's (temporarily) possible on @RulerProtocol on a few collateral types: $BDI, $ibBTC and $NEAR. How does it work? 👇 Image
2) Let's say you have $BDI and want to borrow DAI (you can also choose USDC and USDT). For each BDI deposited as collateral, you are currently able to borrow 150.39 DAI. At the same time, you will only have to repay 150 DAI. You are paid 0.39 DAI which corresponds to -3.34% APR. Image
3) The more you borrow, the higher your borrowing APR becomes. For 100 BDI of collateral, you can borrow 15024 DAI and you will need to repay 15000 only. It's still negative borrowing APR of -2.06%. It becomes positive when you borrow more than 40.5k DAI. ImageImage
Read 6 tweets
korpi Profile picture
2 Jun
1) Almost 90% APR on $BTC with hardly any risk of impermanent loss... This is fully boosted return on mBTC/HBTC pool on @mStable_. Boost requires to lock some $MTA but lock terms are more favorable than trying to get max boost on Curve by locking $CRV. See 🧵 for more details.
2) Let's first explain what mAssets are. They are meta-stablecoins based on baskets of pegged tokens. mUSD is USD stablecoin which can be minted by depositing sUSD, DAI, USDC or USDT into the basket. mBTC is pegged to BTC and is backed by a pool of renBTC, WBTC and sBTC.
3) Feeder Pools are liquidity pools that contain two assets: 50% of mAsset (mUSD or mBTC) and 50% of any other pegged asset (BUSD/GUSD for mUSD, HBTC/TBTC for mBTC). They are similar to pools on Curve which pair "exotic" stables (e.g. $lUSD, $alUSD) with 3pool (USDT+USDC+DAI).
Read 18 tweets
korpi Profile picture
28 May
This is a great thread which uses the on-chain data from last weeks to prove that passive LP strategies on $UNI v3 will be substantially outperformed by active LP strategies (e.g. developed by @VisorFinance). Let me add a few comments to emphasize how big this difference can be.
TL;DR:
- Current comparisons of LP strategies in $UNI v3 overoptimistically present performance of passive ones.
- Passive LPing doesn't stand a chance vs active.
- Bullish on active LP strategy providers, i.e. $VISR
1) @fusion_hodl made a great comparison of passive vs active LP strategy for ETH-USDT since v3 launch. These 3 weeks have been very generous for LPs in this pool. Huge market volatility resulted in a lot of fees and relatively low impermanent loss (IL).
Read 17 tweets
korpi Profile picture
24 May
1) During this market crash, all the prices dumped heavily. It didn't matter if it was a meme coin like $DOGE or $SHIB or capital asset like $SUSHI or $BNT. I hoped fundamentally strong projects would be more resilient to such violent movements. But maybe they still will be? Image
2) I've been very conservative during this bull market. I didn't buy any meme token and decided to stick to DeFi projects which generated revenues. I was ok with $DOGE, $SHIB and $SAFEMOON substantially outperforming my portfolio. I just wanted to play a safe long term game.
3) I focused on DeFi tokens because they are not "coins" like the majority of vapor projects from the previous cycle. They are more like capital assets - projects generate revenues and, therefore, tokens can be subject to traditional valuation metrics.
Read 14 tweets
korpi Profile picture
19 May
Today was a good opportunity to see if high volatility on the market, with stable coins losing their pegs, can impact leveraged farming of $MATIC rewards on $AAVE. Let's see what happened with my position. 🧵👇
The idea of leveraged farming consists in iterative lending and borrowing of the same asset. Using the same asset is supposed to protect the position from liquidation even if debt to collateral ratio (D/C) is very high and close to liquidation ratio.
I assumed earlier that liquidation of such position would not be possible even in case of oracle failure. Today stable coins substantially deviated from their 1$ peg. How did it impact my risky leveraged $USDC farm at 80% D/C (liquidation ratio at 85%)?
Read 6 tweets
korpi Profile picture
14 May
1) I've been liquidity provider (LP) on Uniswap v2 long enough to understand that it was never an easy passive yield. If you didn't actively counteract impermanent loss (IL), it would most likely eat all your profits from fees. How does v3 impact life of LPs? Let's explore.
2) V2 didn't offer LPs any options to manage their liquidity pools. Each LP participated in the same market making strategy (x*y=k). To counteract impact of IL, LPs could merely average their entry prices to the pool and try to time their exit correctly.
3) V3 changes this dramatically. Each LP owns a unique market making (MM) strategy by defining a price range on which they wish to provide liquidity to. This way LPs can easily express their opinions on market movements and compete with other LPs.
Read 26 tweets

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