Uniswap V3 User Analysis: Characteristics of LP Earnings and LP Distribution as Support for Secondary Market Trading
The yield characteristics of Uniswap V3 LP indicate that, in a market with ample liquidity, the current 0.05% fee rate yields higher returns than the 0.30% fee rate LP. However, in a market with insufficient liquidity, the 1.00% fee rate generates relatively higher returns.This article is from FBG Capital, authored by Xiaochen Lin & Jingcheng Li.
Leading DEX Platform Uniswap V3
Since its launch in May this year, Uniswap V3 has rapidly become a leading platform in the DEX market. According to the latest CoinGecko data, Uniswap V3 ranks first in DEX trading volume, accounting for 18.5% of the total trading volume.
The rapid growth of Uniswap V3 can largely be attributed to its unique LP mechanism, which allows LP providers to set their own liquidity price ranges. This not only improves capital efficiency, resulting in LP yields that are dozens or even hundreds of times higher than V2, but it also brings some changes to impermanent loss.
In this report, we analyze Uniswap V3 from two aspects:
LP yield characteristics
The auxiliary role of LP distribution in secondary market trading
We believe that through this research, we can gain a better understanding of the overall market based on underlying data.
Brief Analysis of Uniswap V3 LP Yield Mechanism
Before discussing the two aspects mentioned above, we find it necessary to provide a brief analysis of the Uniswap V3 LP yield mechanism. Here we take the ETH to USDT LP pool as an example. This trading pair has three LP pools with fee rates of 0.05%, 0.30%, and 1.00%. For LP providers, these three pools are independent of each other. However, for LP users (those trading through Uniswap), they cannot directly select a specific LP pool for trading; all LP pools of the same trading pair provide liquidity as a whole.
The yield for an LP is equal to = the fee rate of that LP pool * the trading volume of that LP pool.
From this formula, under the same trading volume, a high-fee LP pool yields more than a low-fee LP pool. It is easy to draw an incorrect conclusion here: to achieve high LP yields, the investment priority should be 1.00% > 0.30% > 0.05%. The reason this conclusion is incorrect is that it overlooks the distribution of trading volume among different fee LP pools.
Through data research and a series of observations, we believe that under user-defined slippage, trading volume will prioritize the low-fee (0.05%) pool. If this pool lacks sufficient liquidity, the remaining volume will then go to the medium-fee (0.30%) pool, and only then to the high-fee (1.00%) pool. This can also be seen from the table above: the TVL of WETH/USDT 0.05% is only about 1/6 of that of WETH/USDT 0.3%, yet its trading volume is almost 1.5 times that of the 0.30% fee pool. Therefore, the low-fee LP pool will "steal" trading volume from the high-fee LP pools.
Having understood this mechanism, we now move on to the discussion of LP yield characteristics and the auxiliary role of LP distribution in secondary market trading.
LP Yield Characteristics
The main characteristics come from the following Top 50 LP Rolling 7-day yield chart.
Characteristic 1: In a market with sufficient liquidity, the current 0.05% fee yields higher LP returns than the 0.30% fee.
From the solid line in the above chart (0.05% ETH to stablecoin LP pool) being consistently above the dashed line (0.30% ETH to stablecoin LP pool), we can see this characteristic.
From our previous understanding of the trading volume distribution mechanism in Uniswap V3, we can deduce the reason: the 0.05% pool "steals" trading volume from the high-fee pools, so although the fee is lower, the additional trading volume compensates and provides higher yields. This yield difference can be seen as a reflection of the differing risk preferences of LP providers: 0.30% LP investors tend to prefer lower risk or are risk-neutral, thus favoring higher fees to compensate for risk.
Characteristic 2: In a market with insufficient liquidity, the 1.00% fee can generate relatively high yields.
This characteristic can be observed from the two marked time points in the above chart, where the bold dashed line shows an increase in yield. These two time points correspond to market declines after May 19 and July 19 (from $1980 to $1730).
The reason for this phenomenon can similarly be explained by the mechanism mentioned above: when the price drops to a low liquidity range, the liquidity from the 0.05% and 0.30% pools can no longer provide the required trading volume, leading to the utilization of liquidity from the 1.00% pool. Moreover, since the 1.00% pool (in the ETH to stablecoin trading pair) generally has a smaller TVL, it may yield extremely high returns in a short period, such as during the drop on May 19, where the 1.00% pool achieved a short-term yield of over 1000% annualized.
Based on the above two characteristics, in the absence of hedging, a relatively good LP yield strategy would be:
Near the current price: invest in 0.05% to capture higher trading volume.
In a slightly wider price range around the current price: invest in 0.30% as a more stable (baseline) LP yield, with lower impermanent loss.
In a price range far from the current price (large rise or fall): invest in 1.00% to seek extremely high yields under extreme market conditions.
The Auxiliary Role of LP Distribution in Secondary Market Trading
Next, we will discuss the second topic of this research: the auxiliary role of LP distribution in secondary market trading.
By capturing underlying data, we can summarize several major BTC/ETH to stablecoin LP pools, concluding LP investors' judgments on the recent price fluctuation range of BTC and ETH.
From the above charts, we conclude that LP providers currently judge the price fluctuation range of BTC/ETH.
Additionally, we can observe that the fund distribution in the 0.05% fee and 0.30% fee ETH to stablecoin LP pools is basically the same. However, the 1.00% pool's funds are more concentrated, mainly in the $1790-$1850 range.
At the same time, by comparing the market before and after the recent decline, we can also conclude that LP providers have not adjusted their positions very quickly; many positions are currently bearing significant impermanent loss. This can be seen from the comparison of the two time points in the following chart.
The above chart is from July 18, when the market price was $1976, and the lower chart is from July 20, when the market price was $1739. Although the ETH price has dropped significantly, there is still a lot of liquidity concentrated in the $1950-$2100 range. These LP providers are bearing considerable impermanent loss (assuming they have not hedged their positions). If they decide to adjust their positions, it could create additional selling pressure on the market.
Through the above analysis, we can see the market investors' expectations regarding the price fluctuation range, which will greatly assist secondary market trading.
Summary
LP Yield Characteristics
In a market with sufficient liquidity, the current 0.05% fee yields higher LP returns than the 0.30% fee.
In a market with insufficient liquidity, the 1.00% fee can generate relatively high yields.
The Auxiliary Role of LP Distribution in Secondary Market Trading
Current LP providers' judgments on the price fluctuation range of BTC/ETH.
Current liquidity is concentrated in the $1950-$2100 range.
Attached is the latest Uniswap V3 Top 50 LP Rolling 7-day yield
Original link: https://www.chainnews.com/articles/455983128661.htm
