Optimal LP Width in Bull/Bear Markets
We analyzed simulated LP performance on ETH-USDC 0.3% pool. Results were surprising: the optimal width was wider than expected! 📢
- What's the optimal width for max returns?
- How does that change for 🐂 vs 🐻 markets?
Find out 👇
LP Strategy
The strategy is simple:
- 💦 LP around the current ETH price with ±X% width
- ⚖️ Rebalance your LP position after a day, week, or month (you pick)
- 💵 Collect & compound your fees!
Our analysis includes >1.5 years of data (Jun 2021 - Jan 2023) on 5 different range factors:
- ±5% (r = 1.05)
- ±20% (r = 1.2)
- ±50% (r = 1.5)
- ±75% (r = 1.75)
- ∞ (UniV2 full-range, r = 1000)
1/13 Read our latest #ResearchBites from @brandonly1000 of the@Panoptic_xyz research team!
— Panoptic (@Panoptic_xyz) January 18, 2023
=====
How do you LP on UniV3 with a ±% range?
E.g. if you wanted ±30% should you do:
1) Lower: P * 70%
Upper: P * 130%
or
2) Lower: P / 1.3
Upper: P * 1.3
Let's find out!👇 pic.twitter.com/QChXAuIonz
Which one did best?🤔
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)
Bull Market Results
For the 🐂 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)
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!)
During 🐂 market, optimal range was tighter (r = 1.5 - 1.75). But during 🐻 market, optimal range was wider (r = 1.75 - ∞). Here's why 👇
Summary
Tight range:
- 🤑 "Greedy"
- 🚀 More fees! (~6,000% cumulative fees in 1.5 years, r = 1.05)
- 💩 Buy losing asset faster, sell winning asset faster
Wide range:
- 🦺 "Safe"
- 🚀 Buy losing asset slower, sell winning asset slower
- 💩 Less fees (16% cumulative fees, r = ∞)
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" 👇
- ✅ Gives probability of landing ITM
- ❌ Doesn't account for where we land ITM
- ❌ Doesn't account for time spent ITM
Caveats:
- ⛽ Ignores gas & rebalancing fees
- 📈 Assumes fees/returns compound day-over-day
- ⚠️ Past performance is no guarantee of future results!
Questions:
- 🌊 What about other pools? (🦄, ₿, SHIB, ...)
- ⚖️ What about stablecoin pools?
Well it turns out ALL performed extremely well: 700% returns for the long/vanilla LP strategy over the past 2 years!
— Guillaume Lambert | lambert.eth | 🦇🔊 (@guil_lambert) January 27, 2023
Even the short strategy gained 400%
What's going on here? Why are returns so high? pic.twitter.com/YJ17pSFs3D
Disclaimer:
- 📢 None of this should be taken as financial advice.
- ⚠️ Past performance is no guarantee of future results!