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Since being launched in May 2021, Uniwasp V3 has attracted a lot of success. The new and improved version of Uniswap V2 promises to provide users with more liquidity and an overall reduction in user fees. This protocol saw a lot of success within the first few weeks of being launched, however, after that progress has been a bit shaky. The reaction from Liquidity Providers also seems to be 50/50.

 

But when investors use Uniswap V3 they can expect a high return. This is far higher than token fees. In order to understand the main driving forces of yield farming on V3, here is a framework to assist Liquidity providers. This Quant framework is designed to simulate token prices while taking into account the distribution of liquidity providers.

 

Contents:

 

What Are the New Features on Uniswap V3?

  1. Liquidity Concentration
  2. Collection Fees

The Quant Framework

Using Graph

Conclusion

 

What Are the New Features on Uniswap V3?

 

Before understanding how the quant framework works, let's look at the new features on Uniswap V3 that make yield farming possible.

 

1. Liquidity Concentration

 

Uniswap V3 makes it possible to specify prices within specific ranges, that is the minimum and maximum costs. This ability gives Liquidity Providers more leverage over prices and leads to more profits. However, the problem arises when prices are out of the set ranges. Once that happens, profits cease to increase, and assets that haven't been performing well become more visible. This makes the LP vulnerable.

 

2. Collection Fees

 

Another new feature is about collection fees. This new protocol states that the fees collected will depend on the number of other LP that are active and provide a specific price range. Unlike the previous model, Uniswap V2, the current one makes price modeling more cumbersome. Price modeling depends on the prices of other liquidity providers which makes it harder to make desired profits.

 

The Quant Framework

 

Being able to simulate token prices provides users with the advantage of coming up with a more accurate amount of the fee to expect. This, in turn, gives room for developing better strategies to increase profits. For any liquidity strategy to work, it needs a liquidity range. Another important key factor for the Liquidity strategy is the fees.

 

With the right information, measuring the assumed metric is possible. All you need to know is the price range, expected fees, and liquidity distribution of LP pools. The Monte Carlo simulation can be used effectively to come up with the metric. This should be calculated using the token price. In this case, the token is the asset that is expected to generate zero gains in a pool.

 

However, keep in mind that it is possible to reverse the entire process. This means that you can use the implied asset to pair and leave with the expected fees. Liquidity distribution within a pool is bound to change over time. Therefore, it is recommended to make short but regular Monte Carlo simulations.

 

Using Graph

 

In the Quant Framework, one of the first steps is to extract the liquidity distribution. This can be done easily using the Graph. For instance, take the USDC/WETH, one of the biggest pools in Uniswap V3. Once you start analyzing it, you can notice that the liquidity price ranges between 1800 to 2400. This falls gradually as prices step outside this range. So in theory, the expectation is to gather more fees and the prices fall. This is true because the majority of the pool will have a fall in prices. So basically, if WETH picks up speed, it means the overall fees collected will reduce.

 

While using the Quant framework, you also have to set up the expected fee for a pool. This should be calculated on a daily basis, as prices can quickly change. The quant framework is very flexible and thus can be used for any price range. The liquidity pool has a great influence on the fees collected. Having new entries in a pool could mean more competition and less profit.

 

Conclusion

 

Uniswab V3 has had a lot of success since it was launched. Within a short tie, it has performed better than many other tokens. Because of its high performance, Uniswap V3 now presents stiff competition. This means more competitive pricing for other Liquidity providers. However, the new Uniswap model makes fee collection difficult, thus reducing profits. This has a negative effect on yield farming for profits as you have to rely on your competitors for the set price.

 

BuLiquidity Providers can improve profits while having a better chance of calculating expected fees. One of the best strategies to find LPs is by calculating the ratio between the fees you're expecting and the tokens realized. You can use a graph to better analyze the data pools. So LPs can have an idea of token prices with more accuracy about the fees that will be collected.

 


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