Model 1: “Fixed-range ” model with a fixed reward price range for stablecoin and pegged-asset
Why does Uniswap V3 need this model?
As we discussed in our last article, and comparing Uniswap V3’s 130M TVL with Curve’s 3.9 Billion TVL, Curve has almost 30 times the TVL of Uniswap V3. However, Uniswap V3’s volume is almost 3 times Curve’s daily volume, which shows Uniswap’s Liquidity Utilization is almost 100 times Curve’s.
Why do so many funds choose to provide liquidity on Curve rather than Uniswap V3 despite such a huge difference in their capital utilization rates? Because the liquidity provider’s goal is simple: to get more revenue; the current revenue on Uniswap comes only from the fees paid by trading users during usage, while Curve can provide CRV tokens, etc. as liquidity mining rewards, thus attracting a large amount of money to provide liquidity on its platform with about 6% APY, compared to Uniswap V3’s APY as transaction fees alone are only about 3%.
This is not only the situation for USD-stable assets but also other pegged assets, such as steth, seth, ankreth, etc. Those assets’ prices need to be stable with ETH’s price, as their token holder could freely exchange their pegged token with original assets. Therefore, the project would like to provide liquidity incentives for liquidity providers and maintain a stable price as much as possible. Therefore, Curve has been the main DEX platform for those pegged assets since Curve could provide concentrated liquidity with low slippage and Curve pools to enable liquidity mining rewards.
To sum up, the main disadvantage for Uniswap V3 is its innovative LP Position NFT, which unlike Uniswap V2 with ERC-20 LP tokens, doesn’t have an efficient mechanism for Liquidity Mining. Liquidity providers couldn’t get enough anticipated rewards only from transaction fees, so they would like to choose a higher APY platform like Curve with liquidity incentives. But izumi’s “Concentrated liquidity mining model” could help Uniswap V3 outperform Curve on trading pairs of stable assets and pegged assets.
How does izumi achieve it?
Firstly, izumi Finance will provide iZi — izumi’s governance token as the basic LP mining rewards to attract Concentrated Liquidity. And for different projects, the developing team and governance DAO could decide to provide their own project token as additional incentives. This will be pretty similar to the Curve Pools, where liquidity providers could earn CRV and project token rewards.
When setting up the detailed incentive program, for stable and pegged assets, we first need to choose a narrow price range，like (0.95p, 1.05p). The concentrated liquidity within that price range will get Liquidity Mining rewards. As the graph shows, each block in the (0.95p,1.05p) price range earns 10 tokens from the stablecoin and pegged-asset issuer and also additional iZi tokens.
When user stakes their Uniswap V3 Lp NFT on izumi platform, izumi will automatically evaluate the total effective liquidity in the (0.95p,1.05p) price range based on the “v_Liquidity=L*N²” formula and assigns it linearly according to the proportion held by each LP, thus attracting liquidity to this range to achieve minimum slippage.
For detailed information regarding how izumi calculates the effective liquidity, please refer to this article.
Note: If the LP provides liquidity in a price range that is over-covering (0.95p,1.05p), only the liquidity within (0.95p,1.05p) is calculated as the weight of the incentive allocation; if the NFT price range offered by the LP is inside (0.95p,1.05p), such as (0.98p,1.02p), no incentive is given or a weight penalty factor is applied.
Analysis: When compared to the xy=k model, the 0.95–1.05 interval is over 50 times more capital efficient, requiring only one-fifth of the TVL and incentives for the same slippage.
You can click the link and check the information about another 4 models that izumi designed to fit different project needs.
About izumi Finance
izumi Finance is the first protocol to support Uniswap V3 “non-homogeneous” liquidity mining and extend concentrated liquidity service for multi-chains. izumi provides “Liquidity as a Service” (LaaS) based on Uniswap V3, with innovatively designed liquidity mining modules of “Concentrated liquidity mining” model for stable assets with a fixed price and “One-sided non-impermanent loss Mining” model for non-stable tokens. These structured models would support any blockchain project to better implement liquidity incentives with much higher capital efficiency and enable liquidity providers to earn extra rewards.