Uniswap V3 User Revenue Analysis and How to Improve It with LP NFT Mining
UniV3 has been launched for nearly half a year, and its trading volume has been steadily topping the DEX list. However, its unique concentrated liquidity mechanism and innovative LP NFT token make it impossible for V3 users to obtain LP token and then do liquidity mining to get additional rewards like other DEX users. This somehow makes V3 users potentialy lose part of their expected income, and is also the most important problem that needs to be solved in UniV3 ecosystem.
Through this report, let’s dive into the data together to analyze the current situation of UniV3 users’ revenue and some strategies about how to improve users’ revenue and overall capital efficiency.
UniV3 user revenue status
From the current overall Uniswap data, UniV3 has significantly outperformed UniV2 in terms of both TVL and trading volume, because of V3’s innovative concentrated liquidity AMM design, which greatly enhances capital efficiency and provides a lower slippage trading experience for users while providing higher commission revenue for liquidity providers.
In particular, comparing the data of V2 and V3 counterparts in USD stablecoin trading pairs better demonstrates the advantage of V3’s concentrated liquidity. V3’s liquidity provider can provide more liquidity around the 1:1 value range, instead of providing liquidity for the full value range as in V2, which can better ensure the price stability of stablecoin pairs. We can also see from the data that V3 is 9.5 times more liquid than V2 in terms of Volume/TVL and 1.4 times more profitable than V2 in terms of Fees/TVL, which shows that with the same amount of liquidity (in this case, TVL), more users and transactions choose to trade on V3, which also brings higher fees revenue for the V3 liquidity provider.
Based on the calculations we can conclude that the expected annual return of these three stablecoin trading pairs is about 3.5%, but the APY of DAI+USDC+USDT 3pool in Curve is about 6.8%, which is basically twice the average APY of UniswapV3 for those trading pairs, and that is why compared to Curve 3pool’s $2.77B TVL, UniswapV3’s is only $248M. The most important revenue gap lies in the Curve platform’s CRV liquidity mining incentives: Curve issues CRV governance tokens for liquidity providers, and users can stake to participate in the decentralized governance of the Curve platform after obtaining CRV tokens, and are also additionally rewarded with CRV tokens corresponding to the market price.
How to increase LP’s revenue and improve capital efficiency
Based on the above data and analysis, the conclusion is obvious, that is, by implementing liquidity mining based on UniV3 LP NFT token, it will greatly increase the expected revenue of liquidity providers and attract more users and funds to participate in its ecology. At the same time, the NFT liquidity mining will also make up for the shortcomings of UniV3 while providing a lot of convenience for various kinds of Blockchain projects, and it will also consolidate the monopoly of Uniswap V3.
Firstly, the project team can provide token rewards for liquidity mining based on Uniswap V3 to incentivize trading liquidity in the initial phase of the project token launch. And in contrast to V2, when combined with LP NFT Mining, the project owner can select a specific price range for the incentive tokens to more efficiently conpensate LP’s impermenant lost in the early stages of the token launch. The implementation of this scenario feature can make Uniswap V3 assume the function of a token launch platform, greatly impacting other DEXs that have IDO as their core function, such as Balancer.
The second category is where the project owner provides liquidity mining rewards for stable assets, incentivizing users to provide liquidity for stable pair assets, reducing transaction slippage and reaching the goal of making the trading pair price relatively stable. Currently, Curve occupies the largest market share in this category of trading, with the main types of trading tokens being various types of US dollar stable, mirrored homogeneous assets and pledged credentials, such as USDC, DAI, wBTC, renBTC, stETH, etc. Projects of those assets often need to provide a large liquidity mining rewards for trading pairs on Curve, Sushiswap for the purpose of coin price stabilization, so that users can stake for liquidity mining after obtaining LP token. This part of the additional incentive for liquidity mining is what drives users to provide liquidity on platforms like Curve. Combined with the mining rewards of the Curve platform’s own token CRV, APRs can often reach 5% or more; in addition, liquidity providers for this asset class do not have to bear a large risk of impermenant losses.
Therefore if LP NFT Mining can be implemented on Uniswap V3, the project team of this class of assets can provide liquidity mining rewards by offering a small range of value intervals around the desired stable price, which can incentivize users to provide more liquidity in smaller price range and further reduce transaction slippage, thus attaining a more stable price.When this type of trading scenario lands in Uniswap V3, it will significantly snatch Curve’s market share, as trading in this asset class accounts for 99% of Curve’s trading volume.The potential incremental business gain for Uniswap V3 is the current average daily transaction volume of about $150m for Curve and the massive $16B TVL behind it, which is more than 5 times the current Uniswap V3 TVL.
And in the third type of scenarios, Uniswap V3, with the ability to implement LP NFT Mining, will not only provide higher expected returns for liquidity providers, but will also provide a new dimension of value gaming for individual projects’ own governance tokens. In the later stages of the project into decentralized governance, the price range of liquidity incentives based on the UniV3 LP NFT Mining will be determined by the decentralized governance community of each project.For each project, community members with governance tokens can exercise their governance vote to initiate UniV3 liquidity mining proposals and vote on the specific price range to incentivise.
Community members can choose to offer liquidity mining rewards for ranges around the current price, which will stabilize the token price and reduces transaction slippage. At the same time, community members can also choose to incentivise liquidity for higher price ranges, which can motivate token holders and liquidity providers to pull up the token price together until the price rises to the range of the liquidity mining reward, so that the liquidity provider can get the liquidity mining reward and achieve a community win-win effect.
Izumi’s UNI V3 LP Mining
We have talked so much about the many benefits that traders, liquidity providers, project teams and the Uniswap platform itself will gain if UniV3 LP NFT Mining is implemented. So how will Izumi Finance actually make this happen?
Firstly, as a liquidity provider, when placing a token into Uniswap V3, it will receive an NFT as a ownership credential for the liquidity placed. And each NFT has 12 key parameters:
- nonce:NFT’s sequence number, a natural number starting from 0
- operator: the address which can operate this NFT, the default address is 0
- token0: the first type of token LP put in, represented by the smart contract address
- token1:the second type of token LP put in, represented by the smart contract address
- fee: the percentage of commission charged per transaction, 3000 means 0.3%
- tickLower: the tick of the lowest price in the price range where the liquidity is placed, p_l=1.0001^tickLower
- tickUpper：the tick of the highest price in the price range where the liquidity is placed, p_u=1.0001^tickUpper
- liquidity: Trading liquidity, expressed as a 128-bit number
- feeGrowthInsider0LastX128：The number of token0 in the accumulated fees (X128 is a mathematical deformation)
- feeGrowthInsider1LastX128：The number of token1 in the accumulated fees (X128 is a mathematical deformation)
- tokensOwed0: the number of tokens0 currently available for withdrawal in the accumulated fee
- tokensOwed1: the number of tokens1 currently available for withdrawal in the accumulated fee
When each liquidity mining program is created on the Izumi platform, an NFT is also automatically generated, which contains the following core parameters:
- Reward token: Number of tokens for liquidity mining incentive program
- Reward per block: the number of liquidity mining incentive tokens distributed per block
- Reward_tickUpper: the tick of the highest price in the price range of the liquidity mining incentive, Reward_pu=1.0001^Reward_tickUpper
- Reward_tickLower：the tick of the lowest price in the price range of the liquidity mining incentive, Reward_pl=1.0001^Reward_tickLower
- start_block: the block number at the start of the liquidity mining program
- end_block：the block number at the end of the liquidity mining program
In izumi’s v3NFT Mining, the algorithm converts each NFT into an FT to calculate the percentage of rewards that should be earned for that NFT. The algorithm for converting NFTs into FTs is freely customizable, and the izumi official version is used by default, which is the following.
The “L” is the Liquidity contained in the NFT and “N” represents the number of ticks contained in the part of the incentive price range that overlaps with the NFT liquidity placement price range.
The “v_Liquidity” computed by the izumi official version will calculate the proportion of the incentive reward that each NFT receives in each block:
Reward(NFT_i)=Reward per block/ Sum(NFT_i)
This version of the algorithm has the following features:
- Inclusiveness: LP will get rewards when the price range in the NFT of Uniswap V3 overlaps with the price range of the liquidity mining inventive.
- Effective bootability: Based on the same amount of token0 and token1, the maximum gain is obtained when the upper and lower bounds of the liquidity price range overlap exactly with the upper and lower bounds of the liquidity mining incentive price interval. For example, the user, who provides liquidity into a very small price range, will get a large Liquidity number and a small N , and eventually the liquidity mining incentive weight obtained by L*N² is less than the case of tiling the token to complete incentive price range.
In the early stages of the project, the Izumi platform and team will base on the NFT Mining algorithm described above to set mining value ranges for mainstream pairs, and Izumi platform tokens will be used as liquidity mining rewards to incentivize more early participation from DeFi users. Afterwards, in the mid to late stages of the project, the mining price range for the relevant pairs will be determined through the decentralized governance of the Izumi DAO, and Izumi’s token holders will have the right to vote on the relevant proposals. At the same time, Izumi will work with each project team and the corresponding decentralized governance community to design different liquidity mining incentive schemes for different project tokens according to their needs, and provide additional Izumi platform tokens as liquidity mining incentives in addition to the corresponding project tokens to further increase the expected revenue of liquidity providers.
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.