The Smart Investor with DefiEdge
Uniswap V3: Liquidity Management for HIGHER YIELDS
“How do I get good returns on my investment?”
“How do I make profit while managing my risk?”
“How should I learn the skill of LM ?”
If these questions have come to your mind then this edition of the newsletter is going to be of great interest to you.
Uniswap V3 has opened a Pandora’s box with its concentrated liquidity mechanism.
You can read more about it in their Whitepaper but the concept will be presented in brief detail here as it’s a requirement to understand today’s magic of Smart Liquidity Management.
Unlike its predecessor Uniswap V2 where all your money is deployed throughout the pool (-inf to +inf range) pair e.g. ETH/USDC pool and you earn the fees based on the ratio of money you provided in the pool. This means even if the price is $1000/ETH or $1500/ETH you will earn the fees based on the ratio of your investments, or simply put, MORE MONEY MORE FEES !
But the new successor opened a revolution and the proof is Uniswap Reaching a Volume of $1T (1 Trillion) Dollars. Now rather than fighting for the fees across the entire pool, you can choose the range(s) of prices to invest your liquidity in. The fees shared will now be based on the ratio within the range the price moved only rather than the whole pool as in case of Uniswap V2. This comes with its own bag of tricks, which are going to make the content of this edition of the newsletter. Let’s BEGIN !
These represent the Swap Fees that one has to pay while swapping from one asset to another. This is the fee which is then distributed to the liquidity providers as a return on their investment. There are 4 types of Fee Tiers currently available on Uniswap V3:
Now the way Uniswap V3 works, you have an impermanent loss whether the price goes up or down. Don’t Worry, this loss is not incurred unless you remove your liquidity and accept this loss. As soon as the current price value moves to the invested price value of your ranges, this loss goes to 0!
You can read more about this in the following articles:
Now we finally come to the section you all have been waiting for, where we ask ourselves some initial questions?
Which pool should I invest in?
What ranges should I invest in?
When to rebalance my position?
How to hedge my position to cover for my Impermanent Loss?
Let’s deep dive into these.
Which pool should I invest in?
Now this has to be a smart decision, because there are some key factors when looking to choose a pool:
Total Value Locked (TVL)
Better TVL usually indicates higher chances of fees generation but both the individual coins in the pool pair should be reliable. Usually stablecoins pool pairs attract the most volume, so if you are open to small amounts of risk, going for a StableCoin-VolatileCoin pair will be the option for you.
The more the volume, the more active is the pool and hence more the chance of Fees Generation during the overall period of the pool.
24 Hr Volume
This is also a good indicator similar to Overall Volume but a more local and recent parameter of judgement than a global one.
24 Hr Fees
This is the golden number, the 24Hr Fees / TVL within active ranges is a great indicator of your possible returns
YES, this is a must see for any pool pair, usually stablecoin pool pairs have narrow ranges and an average return roughly around 7-10%
With Volatile-Stable pair and Volatile-Volatile pair, there might be a skewed distribution not suiting the current price. This a good opportunity for LPing as the ratio will be greatly higher in these cases rather than symmetric distributions.
2. What ranges should I invest in?
This question can never be asked enough times when it comes to Uniswap V3. Each trader has their own preference based on risk appetite. Some areObserved to follow the safer route of long and safe bounds.
Some use the traditional methods like Bollinger Bands for width of ranges.
And finally some go for the methods such as Mean Reversion among many others.
You can check these out and choose the one that suits your palette.
3. When to rebalance my position?
This is an excellent question to ask, and the ones who have mastered the answer to this are reaping great benefits on their investments.
Also we can use Limit Orders as soft signals or removing the liquidity altogether. You can check out Chainlink Keepers or Gelato Ops for better understanding of these, but these are small ranges which when hit on the intended side e.g. $100-$102 range, as soon as $100 is hit, removes all liquidity in that range and an event is generated via limit order contract. This can be used as soft signals for your strategy to take appropriate action of rebalancing.
There are very important scenarios to consider whenever a LP wants to rebalance:
Is the price going to rally upwards?
If this is the case and you have created a soft indicator for this, then you should swap all the assets of the range to the asset you think is going up and hold it rather than keeping the active position and incurring the Impermanent loss.
Is the price going to rally downwards?
This should not happen in case of Stable-Stable pair, unless it’s a depeg event, then you should immediately remove all the liquidity. For a Stable-Volatile pair, best to remove liquidity and swap to the stable coin token while holding it.
Is the price going to be range bound?
This is the perfect scenario as the fees get accumulated during this event while your position stays active. It’s good to track the price range for the past 1 month and past 1 week, which are usually good indicators while also observing the price trend of major movers of the DeFi space such as Bitcoin and Ethereum as this can help you gauge the “price trend of the market v/s the price trend of the individual token”. In such cases rebalancing is usually encouraged only for extreme cases of precision, otherwise for moderate ranges it’s a good way to accumulate fees while minimising the risk.
How to hedge my position to cover for my Impermanent Loss?
This is an excellent way to balance your position and allow you to participate in the LPing during any market conditions as it helps you cover for a directional bias on your position.
We have written an excellent article in detail about “Delta Hedging with Uniswap V3”. Check it for a detailed explanation.
Hope you have thoroughly enjoyed this edition of our newsletter and felt as excited as we did while presenting this edition. Please read the following sections of the newsletter for exciting updates about DefiEdge Protocol and keeping yourself updated with the next DeFi Evolution.
DefiEdge is an asset management protocol built on top of Uniswap V3. DefiEdge connects liquidity providers seeking high capital efficiency with competent strategy managers who will proactively manage their positions on UniswapV3. Liquidity providers get access to high yield strategies, whereas strategy managers who manage high yield strategies will attract more capital and get rewarded with more management fees.
Each newsletter will have a section “Editor’s pick” where we deep dive into one of the strategies on the DefiEdge platform and understand how to maximise profits via using the tips from that strategy.
Strategy of the Week:
MATIC-USDC safe bound on Polygon by Yuriy Myronovych
The strategy has been performing quite well since its inception and is giving stellar returns, APR since inception is 45.1% and Fee APR is 52.3%, strategy is using MATIC-USDC pool on Uniswap V3 with 0.05% fee tier.
What’s Hot in the market?
This section brings to you some of the most trending topics in the DeFi Space to keep you updated and something to put on your watchlist.
Uniswap showing off the volume on their platform more the TVL less the slippage and how trade of $500 million, brings only 0.1% slippage.
Insane liquidity in Uniswap v3 DAI/USDC $500m trades in either direction only create ~0.1% price impact Efficiency on display as well (TVL across the two main DAI/USDC pools is ~$1.3b) Cool to see automated vaults starting to take off too!👀👀👀How about that liquidity depth on @Uniswap for DAI/USDC ?! ($500m DAI -> USDC trade with negligible price impact) @ArrakisFinance is helping to unlock and illustrate the massive potential of Uni V3 https://t.co/pJHcmBKhZNκασσάνδρα.eth @kassandraETH
Uniswap has more than 500k liquidity providers, and just expect the fees you can generate from the volume
Gelato OPS has surpassed 2.5 million transactions that includes automated strategies, limit orders on all chains
Perpetual Protocol V2 completed $12 Billion trading volume
Highlights of the Month
Chain Link has partnered with DefiEdge to provide secure price feeds for minting shares - It acts as an additional layer of security and makes sure that investors are safe from frontruns. We compare price feeds from chainlink to ensure price is in range.
Read the complete article here
DefiEdge also hosted a twitter space with DefiBasket on Profit vs loss in volatile markets and twitter space with Themis protocol on Profits via liquidity management via smart vaults - DefiBasket told the listener how being a builder is good in this market and other projects run after early adoption but they should make sure tech is top notch and makes it an ideal product usable by defi users. Themis told how to make liquidity management easy and profitable by making it more capital efficient and also told about different practices one should consider trading.
Catch up the spaces here
Defiedge Hosted its 1st Strategy Show in their Discord on Smart Liquidity Management via DeFi Edge in which Strategy managers of Defiedge were given very useful points on how to manage strategies.
Defiedge Hosted Twitter Spaces with many great protocols like Perp V2 (@perpprotocol), Themis Protocol (@ThemisProtocol), AcknoLedger (@acknoledger), DeFi Basket (@DeFiBasketLabs), SW DAO (@SW__DAO), DeFi Labs (@DefiLab_xyz) and have already planned Twitter AMA with many other protocols for the next coming month. Defiedge also had an AMA with Polygon(@0xPolygon) in their Discord. Defiedge got a very good responses from the community and great Questions which cherished the space.
Defiedge achieved its first goal of 10M Volume and 100 Strategies
Defiedge community is so bullish that some people wrote a thread about Defiedge Like Kevin who is an COO at @xdefi_wallet
Defiedge Announced ecosystem Integration to Optimism and Arbitrium
Defiedge integrated with 1 Inch
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