"LPs in UniV3 are losing millions per year. Don’t LP unless you’re a pro!”

As a retail level LP, this hasn’t been my experience at all; once I realized LPing is like selling options, it got much easier to LP successfully.

Let’s use options to demystify IL/LVR/JIT/MEV

A 🧵 First: Impermanent loss (IL)

IL was originally used to compare returns of LPing in Uni v2 with those of simply holding the assets separately.

IL is simply gamma risk: it's the accelerating risk of assets conversion away from the initial 50:50 ratio.

#ResearchBites from the @Panoptic_xyz team.

============
One of the core assumptions behind financial models is that prices follow a geometric brownian motion (GBM) --eg. Black-Scholes.

Does the price of the most traded asset in Uniswap v3 also follow a GBM?

Let's find out! 👇 We will analyze the 5, 30, and 100bps ETH-USDC UniV3 pools.

The 5bps pool gets 90% of all volume and, zooming in on the price action, appear to have a smaller "per trade impact" than the 30 and 100bps pools

What is the size distribution of the price jumps for each pool?

Thanks for the many people that reached out about this brainteaser, it is now time for me to post the solutions :)

It turns out the solution is an integral part of how @Panoptic_xyz tracks options NFTs

what does 28253706383254293962.... have to to with NFTs ??

Thread👇
1/16

https://twitter.com/guil_lambert/status/1577709891942318083

(TL;DR) It is really encoding for a ETH-SHIB Reverse Jade Lizard as hinted (!)

We'll show below how it encodes for:

• 1 long put @ 7509 x 10^-12
• 1 short put @ 8070 x 10^-12
• 1 short call @ 8936 x 10^-12

Providing liquidity in Uniswap v3 generates a payoff that is mathematically identical to selling a put option.

Yet, most LPs do not use the tried-and-tested strategies used by options traders.

Here are 8 tips to help Uni v3 LPs behave more like successful options sellers 👇 1/ Have directional assumptions

Is your outlook on the token bearish, neutral, bullish?

You should control the "delta" of a position by shorting the token before locking.

Use the desmos link in this post to determine your LP positions' shorted amount:

https://twitter.com/guil_lambert/status/1481280620072472580?s=20&t=9m3gFXVJCFuWZK4FUsb_YA

Providing liquidity in @Uniswap v3 can be 600x more capital efficient than on Uni v2.

However, most use a passive approach, re-adjust their position too frequently, or provide liquidity to low-yield pools.

Here are 10 tips to make your Uni v3 LPing 10x more efficient.

A 🧵: 1. Know the risks

Providing liquidity has potentially unlimited losses and capped profitability.

LPing can generate income, but returns *will* underperform simply holding when the asset appreciates.

The key is to understand that LPing = selling options:
lambert-guillaume.medium.com/uniswap-v3-lp-…

. @Panoptic_xyz is a perpetual, oracle-free options protocol

-Perpetual: Panoptic options never expire. This completely eliminates the need to roll options

-Oracle-free: This one makes @Panoptic_xyz much more resilient to attacks compared to other protocols.

Here's why👇
1/ 2/ Oracles are necessary whenever a smart contract needs to know about external (real-world) data.

"Without a reliable connection to real-world conditions, smart contracts cannot effectively serve the real-world." (docs.chain.link)

I just published "Designing a constant volatility AMM"

We describe how to construct an AMM that keeps volatility constant regardless of the price dynamics of the underlying.

How do we do this? Read the details below 👇

1/10
link.medium.com/SeyX5EvhXob 2/ First, we have to start from the relationship between the fee tier in Uniswap v3, the daily volume, and the liquidity locked at the currently traded tick.

One can combine these qty to create an "invariant" that is the same across different pools if the track the same asset.

I just published: "Gamma transforms: How to hedge squeeth using Uni V3"

We demonstrate how 1-tick Uni v3 LP positions can perfectly hedge the gamma of positive convexity assets like squeeth.

Gamma transforms? squeeth? convexity?

Let's dig in 👇

lambert-guillaume.medium.com/gamma-transfor… 1/ First, what is gamma? Gamma is a measure of the "convexity" of an asset.
An asset with a positive convexity will increase in value faster as its price goes up. OTOH, an asset with negative convexity will see diminishing returns.
Here's a graph showing how gamma affects price:

I just published "How to deploy delta-neutral liquidity in Uniswap —  or why Euler Finance is a game changer for LPs"
link.medium.com/dX2BFzr8Kmb

1/8
In this post, I show how @eulerfinance allows LPs to deploy directionally strategic positions on Uniswap. 2/8 The problem with liquidity providing is that only pools with a bullish token are profitable.

That's because the value of a LP position has a positive delta and it will follow the price of the asset.

Token ⬆️, LP value goes up
Token ⬇️, LP value goes down

1/ I just published "Pricing Uniswap v3 LP Positions: Towards a New Options Paradigm?"

I offhandedly mentioned in a previous tweet that I may have solved @Uniswap v3. This is my solution.

link.medium.com/0hw6ChIJqkb 2/ Main takeaway: Comparing the expected returns and the options premium of a Uni v3 position can help determine whether it is more beneficial to hold a Uni v3 position or to “lend” it to an options buyer.

Spoiler alert: It is almost* always better to lend a Uni v3 option 🤯

I just published: "An Analysis of the Expected Value of the Impermanent Loss in Uniswap" link.medium.com/rHyIvCTC0jb 1/ In this article, I first derive an expression for the impermanent loss in @Uniswap v3.

One should note that the impermanent loss for Uniswap v3 is always worse than for Uniswap v2.

1/ I've seen many people discussing Impermanent Loss for @Uniswap LP positions, but I think most miss the point. It's all about trade-offs. What do we gain by accepting IL as a fact of life? We get a marked decrease in the *volatility* of our portfolio's value. A thread. 2/ If we look at the impermanent loss of a position consisting of 1000 Dai and $1000 worth of ETH locked in Uniswap V2 on Jan. 2018, we see that the IL today would be close to -50%.

I just published a follow-up article about Uni v3 Options: Synthetic Options and Short Calls in @Uniswap V3 link.medium.com/Q2IYy0i5Dhb 1/ In this article, I describe how to implement short call options using Uniswap v3 LP tokens. Short calls can help hedge against downward moves.