Share this page!

korpi Profile picture
Twitter logo
28 Jul, 28 tweets, 11 min read
There is a common misconception that due to concentrated liquidity on Uni v3 liquidity providers (LPs) earn substantially more trading fees. This is what the original v3 announcement suggests but it's not exactly how it works. Let's find out why! 🧵👇
$UNI
TL;DR:
- Concentrated liquidity on Uni v3 increases capital efficiency but not necessarily Fees APR for LPs.
- Fees APR is dependent on the competition between LPs.
- LPs are incentivized to provide liquidity on narrow price ranges which amplifies their risk of impermanent loss.
1) To begin with, a short reminder where the fees for LPs come from.

When traders swap on AMMs they pay a trading fee which is dependent on AMM/pool:
- Uniswap v2: 0.3%
- Sushiswap: 0.3%
- Uniswap v3: 0.05%, 0.3% or 1%
- Bancor: from 0.1% to 1%
2) Collected fees are shared between LPs and the protocol (token holders):
- Uniswap: 100% to LPs, 0% to $UNI holders
- Sushiswap: 83.3% to LPs, 16.7% to $SUSHI stakers
- Bancor: 45% to LPs, 45% to $BNT LPs and 10% to all BNT holders by BNT supply reduction (55% to the protocol)
3) The amount of fees LPs collect clearly depends on the trading volume. The more volume, the more fees. But it's not the full picture. LPs have to share the fees with other LPs. The higher total liquidity of the pool, the higher competition for the collected fees.
4) What really matters is volume to liquidity ratio (V/L). The higher the V/L, the higher APR from fees for LPs. On most AMMs (Uniswap v2, Sushiswap, Bancor), V/L for a pool determines Fees APR for all the LPs in this pool. Uniswap v3 is different though.
5) All the LPs on traditional AMMs participate in the same market making strategy (e.g. x*y=k), therefore, the fees they get are proportional to their share of the Total Value Locked (TVL) in the pool.
6) Uni v3 allows LPs to customize their market making strategy by defining a price range to which they wish to provide liquidity. This way LPs express their opinions on market movements and also compete with other LPs for fees.
7) Let's assume there are only two LPs who provide liquidity in the same pool with the same capital but different strategies:
- Risk-avoiding LP chooses a wide price range (WPR)
- Risk-tolerant LP chooses a narrow price range (NPR) within the WPR

How do they share trading fees?
8) LPs on Uni v3 earn trading fees only if the current price (P) is in the range they provide liquidity to. If P is in WPR but not in NPR, all the fees go to Risk-avoiding LP. If P is in NPR (hence in WPR too), LPs share the total fees. But not evenly. Risk-tolerant LP gets more.
9) Although both LPs provide the same capital to the AMM, their shares of total liquidity in NPR are not equal. TVL and liquidity on Uni v3 are not the same. LPs, by choosing a price range, allocate their capital in that range only - this is a concept of concentrated liquidity.
10) Concentrated liquidity clearly means a higher capital efficiency in comparison to allocating capital across the entire price curve in x*y=k AMM (e.g. Uni v2). It is often represented by an efficiency multiplier which can reach 4000x improvement vs v2.
11) What does the efficiency multiplier tell us?

For example: LPing on 0.995-1.005 range in v3 DAI/USDC pool has an efficiency multiplier of 400x. It means that $5M concentrated into this range on v3 provides the same depth for traders as $2B on v2.
12) Does the efficiency multiplier of 400x mean that LPs earn 400x more fees? I wish but it doesn't work this way :) It would be true if the pool on v3 had the same volume as the pool on v2 with 400x lower TVL and the market traded in that price range 100% of the time.
13) The free market is (quite) efficient. If there is an opportunity for outsized returns with similar risk profile, capital is reallocated until returns are evened out. That's why LPs on Uni v3 don't necessarily earn substantially more than on v2 as it's often propagated.
14) Let's compare Fees APR between Uni v2 and v3 for LP strategies with a similar risk profile. Because concentrated liquidity substantially increases a risk of IL, v3 LPing may earn more fees than v2 but it may also lose more due to higher IL.
15) Therefore, the best candidates for a fair comparison are pools with very low IL risk, e.g. pools with stablecoins: DAI-USDC, DAI-USDT, USDC-USDT. If we ignore the possibility that a stablecoin can permanently diverge from 1$ peg, IL risk is fairly minimal on both v2 and v3.
16) Let's use the aforementioned range of 0.995-1.005 for DAI/USDC (400x efficiency multiplier). I found some LPs who have been LPing in that range and compared their APRs with APRs for the same periods on Uni v2. Results on the graph below:
17) V3 DAI/USDC position with 400x efficiency multiplier didn't earn substantially more fees for LPs. Surprisingly, it's the opposite. V3 LPs largely underperformed v2 pool in June and July and earned marginally more if they started LPing in early May. Why did it happen?
18) In May Uni v3 had higher volume and lower TVL than in June and July (higher V/L), therefore, LPing was more profitable than it is now. Moreover, competition between LPs wasn't as fierce as today, hence, wide price ranges still offered competitive returns for LPs. Not anymore.
19) The desire to outsmart other LPs incentivized LPs to narrow down their price ranges to earn more fees. As a result the great majority of the total liquidity is concentrated in a single tick (the narrowest possible range) and fees for everyone went down to low single digits.
20) We have come to the gist of the aforementioned misconception about Uni v3:

Concentrated liquidity = Capital efficiency
But:
Concentrated liquidity <> More fees for LPs

And remember we have ignored the impact of IL which completely changes the perspective on volatile pairs!
21) Concentrated liquidity substantially increases the risk of IL. It might be irrelevant on stablecoin pools but it's a serious issue on other pairs. Because of IL, LPs on Uni v3 often underperform buy-and-hold strategy, especially in narrow price ranges.
22) 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 & money.
23) The majority of token holders don't have time & skill & money to become successful LPs on Uni v3. But these requirements are not needed on @Bancor. With single-sided staking and IL-protection, Bancor is an interest-bearing account for token holders.
24) To start saving on Bancor, token holders just need to deposit their favorite tokens and wait while earning trading fees and liquidity mining rewards. They are guaranteed to outperform holding because Bancor protects them from any IL (full protection after 100 days).
25) While other AMMs can often lure LPs with higher Fees APR, the ROI can often become negative when IL is taken into account. Bancor, with its killer IL protection, can be a DeFi bank for all crypto users. Just wait until they discover this opportunity...
Resources I used:
- revert.finance - track Uni v3, Uni v2 and Sushiswap positions
- amm.vav.me - compare LPing profitability on Uni v2, Sushiswap and Bancor
- defi-lab.xyz/uniswapv3simul… - play with Uni v3 ranges to see your efficiency multiplier and IL risk

• • •

Missing some Tweet in this thread? You can try to force a refresh
　

Keep Current with korpi

korpi Profile picture

Stay in touch and get notified when new unrolls are available from this author!

Read all threads

This Thread may be Removed Anytime!

PDF

Twitter may remove this content at anytime! Save it as PDF for later use!

Try unrolling a thread yourself!

how to unroll video
  1. Follow @ThreadReaderApp to mention us!

  2. From a Twitter thread mention us with a keyword "unroll"
@threadreaderapp unroll

Practice here first or read more on our help page!

More from @korpi87

korpi Profile picture
1 Jul
Dear users of @zapper_fi,
I hope you are fully aware of the misleading and often unrealistic "ROI" in the "Opportunities" section for Liquidity Pools.
I hope you realise you can still underperform simple "hodling" even with "ROI" of 100%+.

If not, let me explain to you why. 🧵👇
TL;DR:
- "ROI" on @zapper_fi is based on the fees from the last 24hrs & ignores IL which makes it an unreliable approximation of future returns.
- Toolkit from @ApyVision is a must for LPs in IL-exposed pools.
- IL-protected pools from @Bancor are the best place for passive LPs.
1) Before I start, I want to make it clear that this is not a rant on @zapper_fi. It's a great tool and I use it a lot. But I think the Team could do a much better job when it comes to informing users about certain risks which can result in financial loss.
Read 27 tweets
korpi Profile picture
28 Jun
Do long-term liquidity providers (LPs) to AMMs earn passive income? What is their ROI when the impact of impermanent loss (IL) is included?

I compared LPing on Uniswap and Bancor to check if IL-protection from Bancor is a useful feature for LPs.

See 🧵for more alpha!

$UNI $BNT
TL;DR:

- LPs on Uniswap often end up with less money than they would have by “hodling”, while LPs on Bancor always outperform a buy-and-hold strategy when full IL protection is achieved.
- IL protection is a killer feature for passive income generation.

korpi.medium.com/understand-ban…
1) LPing involves investors lending their idle assets to an AMM in anticipation of passive returns from trading fees. Although trading fees do generate a revenue stream for LPs, it’s not always guaranteed passive income. It would be, were it not for the infamous impermanent loss.
Read 26 tweets
korpi Profile picture
4 Jun
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.
Read 22 tweets
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

Did Thread Reader help you today?

Support us! We are indie developers!

This site is made by just two indie developers on a laptop doing marketing, support and development! Read more about the story.

Become a Premium Member ($3/month or $30/year) and get exclusive features!

Become Premium

Too expensive? Make a small donation by buying us coffee ($5) or help with server cost ($10)

Donate via Paypal Become our Patreon

Thank you for your support!

Follow Us on Twitter!

Like this author's thread?

Get emails when @korpi87 has new unrolls!

Check out other threads from @korpi87!

Read all threads by @korpi87

:(