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Optimal LP Width in Bull/Bear Markets

Β· 3 min read
Brandon Ly

We analyzed simulated LP performance on ETH-USDC 0.3% pool. Results were surprising: the optimal width was wider than expected! πŸ“’

  • What's the optimal width for max returns?
  • How does that change for πŸ‚ vs 🐻 markets?

Find out πŸ‘‡

LP Strategy​

The strategy is simple:

  • πŸ’¦ LP around the current ETH price with Β±X% width
  • βš–οΈ Rebalance your LP position after a day, week, or month (you pick)
  • πŸ’΅ Collect & compound your fees!

Our analysis includes >1.5 years of data (Jun 2021 - Jan 2023) on 5 different range factors:

  • Β±5% (r = 1.05)
  • Β±20% (r = 1.2)
  • Β±50% (r = 1.5)
  • Β±75% (r = 1.75)
  • ∞ (UniV2 full-range, r = 1000)

Which one did best?πŸ€”

Full Period Results​

For the FULL period (Jun 2021 - Jan 2023):

  • Daily rebalancing: r* = ∞ (full range)
  • Weekly rebalancing: r* = 1.5
  • Monthly rebalancing: r* = ∞ (full range)

LPs end up w/negative returns for this pool, but were raking in $ during the bull market (~40% returns in < 6 months)

img-1 img-2 img-3

Bull Market Results​

For the πŸ‚ market (Jun 2021 - Mar 2022):

  • Daily rebalancing: r* = 1.5 - ∞
  • Weekly rebalancing: r* = 1.5
  • Monthly rebalancing: r* = 1.75

LPs end up positive! (~20% returns in 10 months)

img-4 img-5 img-6

Bear Market Results​

For the 🐻 market (Apr 2022 - Jan 2023):

  • Daily rebalancing: r* = ∞
  • Weekly rebalancing: r* = 1.75 - ∞
  • Monthly rebalancing: r* = ∞

LPs end up negative (-24% returns in 10 months, but compare that to -55% returns on ETH!)

img-7 img-8 img-9

During πŸ‚ market, optimal range was tighter (r = 1.5 - 1.75). But during 🐻 market, optimal range was wider (r = 1.75 - ∞). Here's why πŸ‘‡

Summary​

Tight range:

  • πŸ€‘ "Greedy"
  • πŸš€ More fees! (~6,000% cumulative fees in 1.5 years, r = 1.05)
  • πŸ’© Buy losing asset faster, sell winning asset faster

Wide range:

  • 🦺 "Safe"
  • πŸš€ Buy losing asset slower, sell winning asset slower
  • πŸ’© Less fees (16% cumulative fees, r = ∞)

img-10 img-11

There's a tradeoff in choosing r:

  • ⬆️ fees ⬇️ payoffs or
  • ⬇️ fees ⬆️ payoffs

@guil_lambert has a good "Guide For Choosing Optimal Uniswap V3 LP Positions" πŸ‘‡

  • βœ… Gives probability of landing ITM
  • ❌ Doesn't account for where we land ITM
  • ❌ Doesn't account for time spent ITM

img-12

Caveats:

  • β›½ Ignores gas & rebalancing fees
  • πŸ“ˆ Assumes fees/returns compound day-over-day
  • ⚠️ Past performance is no guarantee of future results!

Questions:

  • 🌊 What about other pools? (πŸ¦„, β‚Ώ, SHIB, ...)
  • βš–οΈ What about stablecoin pools?

Disclaimer:

  • πŸ“’ None of this should be taken as financial advice.
  • ⚠️ Past performance is no guarantee of future results!