Izumi Finance R3 System
Concentrated Liquidity Opportunities
Concentrated liquidity is at the heart of Uniswap v3 and represents a monumental advancement for liquidity providers (LPs). In Uniswap v2, uniform distribution allowed trading across the entire price interval without liquidity loss, from 0 to infinity. While this sounds great in terms of maximizing liquidity, a large majority is never used. In v3, LPs select the price range that matches their risk appetite. Launching in March of 2021, v3 is still in its infancy; while it is attractive in and of itself, it is apparent that this new version extends new opportunities for those migrating from v2 and those new to decentralized finance (DeFi).
The opportunities presented in v3 are at the crux of Izumi Finance. The R3 Vault is just one of its modules; others include a cross-chain bridge, platform-specific toolbox, and NFT mining. Most of the framework for the R3 protocol has already been mapped out, as summarized in this article, though official deployment is targeted in the second half of 2022.
Logistics of R3 Vault
R3 Vault is an optimized liquidity mining management system designed by Izumi Finance that adds additional features to Uniswap v3. R3 develops active liquidity management strategies based on data mining, Layer-2 oracle computing, and standardized application programming interfaces (APIs). The most profitable pools are identified and selected, considering both volume and attractiveness of incentives. The price ranges are also chosen to deploy liquidity. Finding the price with the maximum expected fluctuation density is critical to the success of its optimization.
The R3 system considers the ratio of the blockchain transaction fee to capital volume when dividing the observation period into different nodes, maximizing LP income. During optimization, liquidity of the sub-nodes is adjusted and distributed into three types of range orders (see below), using a combination of machine learning algorithms that consider historical price data, Total Value Locked (TVL) metric, and Average True Range (ATR) model.
- Limit orders are deployed just outside of the current price, working for rebalancing or trending strategy. In addition, R3 Vault has an auto-withdraw function. Like in centralized exchanges (CEXs), this function places a narrow price range order and withdraws liquidity after the price goes through the range.
- Full orders are primarily designed for long-term asset allocation, with full-range cover and symmetrical deployment as in UniSwap v2.
- Concentrated orders bind the current position within an arbitrary price range and earn fees while remaining capital-efficient.
Izumi Optimizes Transition to v3
Liquidity management in Uniswap v3 varies dramatically from passively providing liquidity in Uniswap v2. This distinction is easily illustrated in the realization and accumulation of impermanent loss during active liquidity rebalancing. The R3 system focuses on the comprehensive reward, not just on maximizing collected fees and minimizing impermanent loss, but an optimized combination of the two. As a result, LPs maximize their earnings with limited risk.
LPs accustomed to Uniswap v2 are familiar with the untapped potential of idle liquidity outside the usual price range. Another benefit of Izumi’s protocol is a tool available to these users as they shift to v3, enabling them to earn arbitrage rewards. The previously idle liquidity is withdrawn and invested into lending protocols such as AAVE or Compound, offering an even greater return on investment (ROI).
Izumi Finance is the first protocol to support Uniswap v3 liquidity mining and concentrated liquidity for multi-chain users with NFT incentive distribution.
Litepaper & Research: https://docs.izumi.finance/
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