Model 3: “Dynamic Range” model incentivizes non-stable tokens to provide dynamic liquidity around the current price
After the previous “Fixed Range “ model and “One-sided non-impermanent loss Mining” model, this time iZUMi Finance will follow the roadmap and launch the latest Uniswap V3 Liquidity Mining model to serve a wider range of tokens with high volatility. With this model, iZUMi will provide its partner projects and their DAO community with a Liquidity Mining model with super-efficient capital utilization and excess returns for the liquidity providers of the corresponding trading pools.
Why Does Uniswap V3 need this model？
Model 1 “Fixed Range” solves the problem of liquidity of stable coins and pegged assets in a relatively narrow price range on Uniswap V3, while Model 2 “One Side” solves the problem of how emerging projects can provide their own holders with a model that does not have impermanent losses when the price rises and is also supported by excess liquidity mining return, while greatly complementing the on-chain liquidity during the initial stage.
The newest “Dynamic Range” model will expand to a broader market and serve a more general type of crypto project: established projects with high volatility in token prices. This is the largest segment of the on-chain trading market, and many projects have their own Staking or Uniswap V2 LP token-based liquidity mining programs. However, the inflation model generated by Staking and the inefficient liquidity mining model based on Uniswap V2 is not adaptable to the current on-chain liquidity environment.
Additionally, in iZUMi’s previous post on an in-depth analysis of the Impermanent Loss of Uniswap V3 liquidity providers (link), we discussed that based on the on-chain data, Uniswap V3 liquidity providers are in an overall loss-making position due to Impermanent Loss. In other words, for these liquidity providers, if they did not choose to provide liquidity on Uniswap V3, but simply hodl the crypto assets in their hands, they would probably end up with a higher return on their investment.
So the insufficient return on investment for liquidity providers is also a major issue that Uniswap V3 urgently needs to address.
How Does iZUMi achieve it?
For on-chain trading in UniswapV3, the most important thing is the thickness of liquidity around the current price, as this results in lower trading slippage for the trading user and the LP needs the price to stay within the value range of the liquidity it provides in order to receive trading fees.
Therefore, in iZUMi’s model 3 “Dynamic Range”, users participate in liquidity mining by setting the liquidity in the (0.25Pc, 4Pc) value range of the current price (Pc). The width of the price range can also be set by the project team, for example to (0.5Pc, 2Pc), which will also provide more concentrated liquidity. After the user provides liquidity to the pair at the set price range through the iZUMi platform, the iZUMi smart contract will automatically stake Uniswap V3 LP NFT into the liquidity mining program and the liquidity provider will automatically participate in the mining and start receiving the liquidity mining rewards provided by iZUMi and the corresponding project.
In addition to this, LPs will also receive trading fee revenue from Uniswap V3 because the value range set by the liquidity provider includes the current token price. The combination of these two revenues will significantly increase the liquidity provider’s expected returns.
The benefits of a liquidity provider’s participation in liquidity mining will be calculated as a percentage of the total liquidity of the program in terms of the thickness of the liquidity it provides (v_liquidity), as follows:
Based on the above equation, we can conclude that compared to traditional liquidity mining activities in the full range, based on the iZUMi model 3 “Dynamic Range”, if the price range is set to (0.5*Pc, 2*Pc), it will provide approximately three times more efficient capital utilization.
And based on the “Dynamic Range” Model, users do not need to adjust their positions frequently. Even if there is an extreme situation where the price of the coin has a large unilateral movement and breaks the value range (0.25Pc, 4Pc) corresponding to the price of the token when participating in liquidity mining, the Uniswap V3 LP NFT that the user has staked will continue to generate liquidity mining revenue for the user as long as the liquidity mining is not terminated. Of course, liquidity providers can choose to redeem and re-provide liquidity based on the latest price, which ensures that they will continue to receive Uniswap V3 trading fees in addition to the liquidity mining revenue.
Why LP should choose the “Dynamic Range” model on iZUMi?
- Higher returns: Compared to traditional liquidity mining models, capital efficiency can be increased to more than three times, while making up for a higher share of transaction fees in the value range.
- Better security: Unlike other Uniswap V3-based protocols, iZUMi does not use Vault and smart contracts to help LPs automate their positions, and also does not incur permanent losses due to auto-rebalance. Also, the user’s capital is kept in Uniswap V3, so it is safer to only stake LP NFTs.
- Fairer on-chain market-making solution: The “Dynamic Range” model is more friendly to regular liquidity providers while taking away the competitive advantage of professional on-chain market makers, who only get a share of Uniswap V3’s trading fees, but not the liquidity mining rewards that regular users get.
- Better user experience: iZUMi platform automatically helps users set the value range that matches the liquidity mining program based on the current token price and provides the corresponding trading pair coins 1:1 to the Uniswap V3 liquidity pool. And iZUMi contains automatic anti-MEV attack checks to protect liquidity providers. And after the liquidity providers participate in liquidity mining, they can continuously receive the liquidity mining revenue without further operations, and at the same time, they can directly redeem it at any time.
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.