For this reason, we can call it an impermanent loss. We have provided great incentives to our liquidity pools so far offering over $650,000 in rewards to date across Uniswap, DFyn and QuickSwap, as well as Router Protocol’s Galaxy Farm 2! The protocol retains a portion of the payout (asset $A$) to the trader as transaction fees. As we now understand how Uniswap works as a DEX, let us know its features in detail. In a nutshell, the former deposits equal value of any pair of assets into the liquidity pool and the latter trades one for the other based on what’s available in the pool. In this post, we study the characteristics of the price dynamics in Uniswap under the usual assumption that the prices of the underlying asset pair follow a drift-diffusion process. They store specific cryptocurrencies that allow buy and sell orders to execute smoothly. Yet since the Uniswap protocol charges a 0.30% fee to all trades and returns these charges to liquidity pools without new LP shares being created, returns are shared proportionally among pools’ liquidity providers. This is called impermanent loss. The fees are put back to the pool right away and every liquidity provider has a pro rata claim on them. This implies a price of 1 ETH = 100 DAI. While writing this Uniswap review, we've found one KISHU-ETH pool returning more than 2,200% in yearly (APY) earnings for LPs, while an AKITA-ETH pool is offering its LPs gains of over 1,400%. Obviously no one wants to provide liquidity out of charitable means, and the revenue isn’t dependent on the ability to flip out of good trades (there is no flipping). Augur is powered by REP- an ERC-20 crypto coin. if $a_{ t-1 }$ is greater than $a’_t$, the trader must have purchased asset $A$ with asset $B$, resulting in a decline in the balance of asset $A$ and an increase in that of asset $B$. The loss is the same whichever direction the price change occurs in (i.e. When investors pool their assets into Uniswap, they get liquidity tokens ("LP tokens") back in return. To understand why the value of a liquidity provider’s stake can go down despite income from fees, we need to look a bit more closely at the formula used by Uniswap to govern trading. While the individual prices of asset $A$ and $B$ can still very much follow their own dynamics, Uniswap provides a way for traders to express their view on the price of one in terms of the other. The protocol retains a portion of the payout (asset $B$) to the trader as transaction fees. As much as it’s work in progress, let’s take a moment to appreciate how a simple idea can go a long way in the name of decentralized finance. Secondly, a low correlation brings diversification so it’s expected to have lower volatility. Traders will add DAI and remove ETH until the new ratio is now 150:1. If you have $20 of DAI stable coin in the collection, it should have $20 worth of Ethers. Right now ETH/MTA pool showing highest APR of over 333% , the monthly net yield is expected about 27%. It’s the … The purpose of this campaign is that in return for providing liquidity to our OCC/USDC Uniswap liquidity pool, participants will receive OCC-denominated liquidity … Just to name a few: In other words, Uniswap appears to achieve infinite market depth with finite supply of assets. But since DAI is approximately equivalent to USD, we might prefer to convert the entire amount into DAI to understand the overall impact of the price change. Adds Ether Cryptocurrency as Alternative Asset to Balance SheetVANCOUVER, British Columbia, April 20, 2021 (GLOBE NEWSWIRE) -- Global Cannabis Applications Corp. ("GCAC" or the "Company") (CSE: APP, FSE: 2FA, OTCQB: FUAPF), a leading medical cannabis chain-of-custody compliance and data platform, announced today that it has launched a Uniswap … While NYSE and NASDAQ use an order book to achieve price discovery function and balance supply with demand, Uniswap, the biggest decentralized exchange, relies on what’s known as the constant product formula. By providing $500,000 to the liquidity pool the user might be entitled to collect from $70,000 to $135,000 yearly in returns. This requires a slight modification to the constant production formula introduced earlier: where $f_t$ is the amount of transaction fees collected at time $t$. The consequence of this formula is that for trades which are very small in value compared to the size of the liquidity pool we have: Combining these two equations, we can work out the size of each liquidity pool at any given price, assuming constant total liquidity: So let’s look at the impact of a price change on a liquidity provider. So our liquidity provider lost out by 0.91 DAI by providing liquidity to Uniswap instead of just holding onto their initial ETH and DAI.”, “Of course, if the price were to return to the same value as when the liquidity provider added their liquidity, this loss would disappear. Roughly $500 worth of profit was missed out on as a result of the market making. For details, please refer to the appendix . Anyone can become a liquidity provider by depositing tokens into a smart contract and receive pool tokens in return. a doubling in price results in the same loss as a halving).” —>, https://medium.com/@pintail/uniswap-a-good-deal-for-liquidity-providers-104c0b6816f2, “a 1.25x price change results in a 0.6% loss relative to HODL”, “a 1.50x price change results in a 2.0% loss relative to HODL”, “a 1.75x price change results in a 3.8% loss relative to HODL”, “a 2x price change results in a 5.7% loss relative to HODL”, “a 3x price change results in a 13.4% loss relative to HODL”, “a 4x price change results in a 20.0% loss relative to HODL”, “a 5x price change results in a 25.5% loss relative to HODL”. When deposited 10 DAI and 0.0472 ETH, I received back 0.04147 Uniswap tokens. At any point in time, we have: This is known as the constant product formula. By contrast, a buy and hold strategy will have the following payoff at time $t$: The payoff at time $t$ for liquidity providers can be further decomposed into two parts - capital appreciation (or depreciation) due to price slippage and income from collecting transaction fees. Note that the analysis assumes zero liquidity pool growth (other than due to transaction fees) and zero risk-free rate as well. Now, if a new order comes along to buy $\Delta a_1$ units of asset $A$, after the transaction settles, the ending balances in the pool for asset $A$ and $B$ will be: which indicates that asset $A$ has appreciated against asset $B$, as a result of having fulfilled the demand for asset $A$ and the subsequent “scarcity” of it in the pool. Unlike decentralized exchanges based on order books, in an AMM-type decentralized exchange (DEX) any user can act as a liquidity provider. How important is the correlation parameter? Curve Finance – Top pools by liquidity To become a liquidity provider, you will deposit an equal value of each underlying token in return for other tokens available in the pool. Sharpe ratio also improves as the increase in expected return outpaces the increase in volatility. In the extreme case, a correlation of 1 will result in very little price movement in relative terms, to the point where the return dynamics of liquidity provider behave very close to that of a buy and hold. Action steps. Instead, Uniswap uses what are called Liquidity Pools. In other words, everything is being valued on a relative term in the Uniswap exchange. LPs can utilize Unbound to provide liquidity much more than their capital efficiency. What is the new value of the liquidity provider’s stake? It’s difficult to know what the trade-off is between revenues from fees and losses from directional movements without knowing the amount of in-between trades. To keep things simple, let’s imagine our liquidity provider supplies 1 ETH and 100 DAI to the Uniswap DAI exchange, giving them 1% of a liquidity pool which contains 100 ETH and 10,000 DAI. 2020. Each Uniswap smart contract has a liquidity pool with reserves of both the ERC 20 tokens of that pair. You can stake your Uniswap LP tokens to receive UNI tokens. The pool tokens can … It quickly became popular among liquidity providers and is now used by thousands of users, analyzing ~$100M of liquidity investments every week across Uniswap, Curve, Balancer and Sushiswap. Assume the prices of asset $A$ and $B$ follow the following dynamics: where $dW^A$ and $dW^B$ are correlated Brownian motions: Thanks to the explicit linkage between volume and price specified by the constant product formula, we have everything we need to back out the trading volume it takes to move the price by that much. Withdrawing the 10% that we are entitled to would now yield 12,240 DAI and 81.7 ETH. For example, Uniswap collects 0.3% on every transaction. Realized Uniswap returns are dependent on three factors: 1) asset prices when supplied and withdrawn, 2) liquidity pool size, and 3) trading volumes. Just like how Bitcoin aims at revolutionizing money, automated market maker (AMM) emerges as the disruptor of traditional exchange. To understand the risks associated with providing liquidity you can read https://medium.com/@pintail/uniswap-a-good-deal-for-liquidity-providers-104c0b6816f2 to get an in-depth look at how to conceptualize a liquidity position. By providing liquidity pairs using Ethereum (ETH) and another ERC-20 token, liquidity providers can exchange their held assets for liquidity pool tokens in return for a percentage of the trading fees accrued as trades are executed using the provided liquidity. if $a_{ t-1 }$ is less than $a’_t$, the trader must have purchased asset $B$ with asset $A$, resulting in an decline in the balance of asset $B$ and an increase in that of asset $A$. Let us walk you through the steps to yield-farm TERN by providing liquidity to pools through Uniswap. The Uniswap AMM model uses a formula to calculate and balance liquidity on the platform: x * y = k. … This setup has a few desirable properties to it. Complete weekly assignment: Zap liquidity to Uniswap UNI token is used for governance and liquidity mining. Selecting the right pools, understanding impermanent losses, and measuring your returns—these are the first steps to making money on Uniswap. There is a risk of losing money during large and sustained movement in the underlying asset price compared to simply holding an asset. Providing liquidity for Uniswap’s LEND-ETH pool between January 1 and June 1 would have resulted in an 11% net loss, as LEND went parabolic, via ZumZoom. https://uniswap.org/docs/v2/advanced-topics/understanding-returns Market making, in general, is a complex activity. “Uniswap: A Good Deal for Liquidity Providers?”, AlfaBlok. You can click on particular pool to know more about in detail. Liquidity is typically represented by discrete orders placed by individuals onto a … The more chop and back and forth, the better. Still neglecting fees, let’s imagine that after some trading, the price has changed; 1 ETH is now worth 120 DAI. A liquidity pool contains amounts of Ethereum and an ERC-20 altcoin of equal value. Uniswap charges a 0.30% transaction fee on all trades, which is added to the reserve pool. At time $0$, there are $a_0$ units of asset $A$ and $b_0$ units of asset $B$ in the pool. The native cryptocurrency of the Uniswap protocol is UNI tokens. Uniswap is by no means perfect (especially for those who are targeting an 100% buyout!). where $A_t$ and $B_t$ are the unit prices of asset $A$ and $B$ measured in a common numeraire (be it Bitcoin or US dollar, your choice). We get the following:”, ”impermanent_loss = 2 * sqrt(price_ratio) / (1+price_ratio) — 1”, “Which we can plot out to get a general sense of the scale of the impermanent loss at different price ratios:”, “N.B. You can become a liquidity provider for a pool on Uniswap. According to Uniswap’s blog post announcing the upgrades, liquidity providers can now “provide liquidity with up to 4000x capital efficiency relative to Uniswap v2, earning higher returns on their capital.” They can also significantly increase risk exposure to their favorite assets while reducing downside risk. APY – 26.97%. Generally, the liquidity provider puts down: amount of money (again, measured in an arbitrary numeraire) today in exchange for: at time $t$. For example, WBTC/ETH will have a liquidity pool with reserves of WBTC and ETH tokens. The protocol has become one of the pillars of the DeFi ecosystem in Ethereum. As it stands, fee income is effectively the sole incentive for liquidity providers to contribute assets into the pool, compared to simply holding on to the asset pair. All three come with 1x, 3x, and 10x leverage. 2019. Under a set of arbitrarily-selected parameters, simulation results suggest that even after accounting for transaction fees, the buy and hold strategy still delivers a higher expected return after 1000 steps (transactions). Because the amount supplied is equal to 10% of the total liquidity, the contract mints and sends the market maker “liquidity tokens” which entitle them to 10% of the liquidity available in the pool. One other thing to understand about how this works is that when you deposit liquidity, you are depositing your crypto and you’re receiving back a Uniswap token. How liquidity pools are calculated. The current crypto bull run has seen the creation of a plethora of … ), it also implies that the current exchange rate of one unit of asset $A$ in terms asset $B$ is. The contract reflects something closer to 122,400 DAI and 817 ETH (to check these numbers are accurate, 122,400 * 817 = 100,000,000 (our constant product) and 122,400 / 817 = 150, our new price). Unbound enables ‘single-sided liquidity positions where users can add one token to a pool instead of two tokens (in V2). The features of Uniswap can be listed as follows: 1. The Uniswap contract should reflect this change as well after some arbitrage. (Above) Holding ETH vs. using the ETH to supply an ETH/DAI liquidity pool. Liquidity provider benefits from a low correlation in at least two ways from a mean-variance optimization standpoint. Risk/Reward of liquidity provision in AMMs, if there’s no trade, the relative price level (i.e., exchange rate) stays at its initial value, a smaller trade is expected to be fulfilled at the market price of exchange without moving it too much, a larger trade will move the price substantially along the hyperbolic curve, with the asset in demand appreciating against the other. Well, now we can easily see that, at the new price, the total value would be 220 DAI. First, the lower the correlation is, the more the two assets’ prices tend to move in opposite directions. All else equal, the higher the fee, the higher the return. At the current price then, our liquidity is worth a total of 219.09 DAI. It also outperforms buy and hold in terms of Sharpe ratio. In addition, choices of various parameters have subtle yet profound implications on the risk and reward tradeoff and the nature of the underlying asset pairs plays an important role as well. In the absence of transaction fees, compare the terminal values of the two following strategies: Meanwhile, strategy Y will have a terminal value of: As a result, a buy and hold strategy always outperforms being a liquidity provider in the absence of fee income. What happens to the liquidity provider? Using the equations above, we can derive a formula for the size of the impermanent loss in terms of the price ratio between when liquidity was supplied and now. Now let’s assume the price trades on Coinbase from $100 to $150. Last but not least, a higher transaction fee rate undoubtedly works in liquidity providers’ favor. Over the period, the Uniswap DAI-ETH pool earned a 18.15% return. Uniswap tries to solve this problem by introducing liquidity pools. TORTOLA, BVI / ACCESSWIRE / May 12, 2021 / Crypto Derivatives and Futures Exchange Scalpex has launched three unique perpetual swaps DeFi Futures contracts based on the stable Uniswap Liquidity Pools Tokens ETH/USDT, UNI/ETH, and WBTC/ETH. Depending whether the order is to buy asset $A$ with asset $B$ or vice versa, transaction fees can either take the form of asset $A$ or $B$ before being put back to the liquidity pool. Instead, 0.3% of all trade volume is distributed proportionally to all liquidity providers. Review historical returns for Uniswap liquidity providers and transparent trading activity. What if the liquidity provider had just held onto their original 1 ETH and 100 DAI? Leading Dentist Sean Wilson of Santa Rosa, Ca. This article is a Uniswap beginner’s guide. To compensate for the underperformance, AMM usually charges a fee for trading. Uniswap is one of the best-known decentralized exchanges. Examine the liquidity pool composed of asset $A$ and $B$. By default, these fees are put back into the liquidity pool, but can be collected any time. The fees are put back to the pool right away and every liquidity provider has a pro rata claim on them. Uniswap incentivizes users to add liquidity to trading pools by rewarding providers with the fees generated when other users trade with those pools. At the time of writing, Uniswap has over $2.5 billion in total value locked in its liquidity pool according to DeFi Pulse, proving that there is indeed an appetite to end the monopoly of traditional exchange. Uniswap: A Good Deal for Liquidity Providers? 9 Top Features of Uniswap. The Uniswap protocol facilitates decentralized swaps of crypto-assets through an automated market maker (AMM) type design. Pintail. The total fee accumulated will be distributed to the liquidity providers when they reclaim their stakes by burning their pool tokens. They are merely an accounting or bookkeeping tool to keep track of how much the liquidity providers are owed. The DeFi boom of 2020 has made Uniswap an extremely popular marketplace. Those who have interacted with Uniswap or provided liquidity to liquidity pools before September 1, 2020, at 12:00 am UTC can view and claim their UNI token rewards by connecting their wallets to the dapp. That $400 doesn’t look all that enticing now. Plugging the numbers into the formulae above, we have: “Since our liquidity provider has 1% of the liquidity tokens, this means they can now claim 0.9129 ETH and 109.54 DAI from the liquidity pool. This creates interesting ramifications in terms of risk for the liquidity providers. The total market value here is $24,500. If we neglect trading fees, we have the following: In other words, the number of tokens a trader receives for their ETH and vice versa is calculated such that after the trade, the product of the two liquidity pools is the same as it was before the trade. As it stands, fee income is effectively the sole incentive for liquidity providers to contribute assets into the pool, compared to simply holding on to the asset pair. A liquidity pool. Here’s a break down: Uniswap. And this is a Uniswap token that’s specific to the pool that you’re in. One of AMM’s most important divergences from traditional exchange is that it divides its market participants into two distinct roles: liquidity providers and traders. IGG distributed: 134,567,870 IGG … “Risk/Reward of liquidity provision in AMMs”. We will show you step-by-step how to make a trade and how to provide liquidity in Uniswap. Compare Uniswap pool returns on pools.fyi and select a pool to try. Yield and Liquidity Table . Prices and Plans Uniswap charges a 0.30% fee on all trades which is added to the reserve pool. The returns would vary for investors who provided liquidity at different times due to different ETH/DAI prices. The terminal state alone is no longer sufficient to uniquely determine the payoff to liquidity provider - the path through which it arrives at the ending price also matters. Thereby, LPs can earn higher returns on their capital. Gone is the order-book-style matchmaking; in its stead is an explicit law that governs the comovement between price and volume. So the advantages for LPs to migrate to Uniswap V3 is concluded as below: LPs can provide liquidity with up to 4000x capital efficiency relative to Uniswap v2, earning higher returns on their capital; Capital efficiency paves the way for low-slippage trade execution that can surpass both centralized exchanges and stablecoin-focused AMMs; Ignoring fees, the new price pair $A_t$ and $B_t$ defines how the balances of asset $A$ and $B$ evolve from the time $t-1$ to time $t$: After taking transaction fees into consideration, we have the final form of remaining balances in the liquidity pool: where $c$ is the transaction fee rate and $\textbf{ 1 }$ is the indicator function that takes the value of 1 if the underlying condition is true, or 0 if otherwise. These are not speculative tokens to be traded. Although Uniswap suggests comparatively low yearly APY this is the best pool for the whale type investors.