Mobility Competition: Uniswap v3 Fee and Bottom-to-Bottom Competition

In v2, each pool has an expense ratio of 0.3% and each liquidity position supports a range of potential prices ($0 to infinity).

Mobility Competition: Uniswap v3 Fee and Bottom-to-Bottom Competition

In v2, each pool has an expense ratio of 0.3% and each liquidity position supports a potential price range ($0 to infinity). Therefore, the only way for liquidity providers (LPs) to compete for fees is to inject more money into the pool. The only force required to compete is size. However, the functionality of Uniswap v3 introduces two new vectors to compete with.

Customized Liquidity Range: Liquidity Providers (LPs) can choose the price range they wish to support. For example, instead of $0 to $infinity, I can choose $50-$100. By customizing the liquidity range, each LP can compete to provide a more accurate range than other participants.

Multiple fee tiers: Instead of being locked into a 0.3% charge rate, LPs can choose to create their pools at 1%, 0.3%, or 0.05% per transaction. With multiple fee tiers, LPs can compete by offering the best price per transaction. We will focus on fee tiers today because that’s where the action is.

Price Competition
If you shop on an e-commerce marketplace, you’ll see price competition everywhere. The seller who charges the lowest price for an item will win the sale, and the revenue from the sale is the money in their pocket. A savvy seller might look at a list of best sellers, grab the first few SKUs, and list them at a lower price. They will sacrifice a little profit for each unit in the short term, but the bet is that over time they will eventually make more profit due to additional demand.

So for now, let’s pass that framework on to Uniswap LP. at the time of writing, the USDC/ETH 0.3% pool is the most traded currency pair on Uniswap v3 by a considerable margin, almost 4x the next most traded pool. This pool is also the most saturated, with over $400 million deposited (Total Value Locked – TVL). So, if you are like me, far from millions, but want to get involved: where can you look for opportunities?

Mobility Competition: Uniswap v3 Fee and Bottom-to-Bottom Competition

(Top 5 mining pools by fees: June 4-6, 2021 (GTC is the most recently launched token))

You lower the price.

From May 30, 2021 to June 2, 2021, USDC/ETH goes TVL at a cheaper 0.05% fee tier, from $700,000 to 15x $10 million. Once supply is in place, as in any good market, demand will follow. At the peak on June 2, $10 million of liquidity supported $80 million of volume (8x volume/TVL), while $400 million of liquidity in the higher 0.3% pricing tier supported $320 million of volume over the same period (< 1x volume/TVL).

The lower pricing tier has not yet fully taken over, but it is coming, and it is also more profitable.

Mobility Competition: Uniswap v3 Fee and Bottom-to-Bottom Competition

(Uniswap v3 info – USDC/ETH 0.05% trading volume)

In the case of e-commerce sellers, lowering the price is a risk that is only rewarded if it results in enough additional sales. This risk is also present in the USDC/ETH 0.05% liquidity pool. LP has cut their acceptance rate by 1/6th, but has improved their capital efficiency by a factor of 8 to date. While the pool is still growing, LPs willing to cut are getting a higher return (79% APY at 0.05% vs. 58% APY at 0.30%).

Mobility Competition: Uniswap v3 Fee and Bottom-to-Bottom Competition

(USDC/ETH pool comparison: June 4 – 6, 2021 (Top: 0.3%, Bottom: 0.05%))

LP Strategy
So, if you want to deposit into the Uniswap v3 liquidity pool, what will you do with this information? Do you optimize for higher acceptance rates and stick to the 0.3% tier? Or do you undercut your competition, swallowing 1/6th of the cut and chasing additional volume at the 0.05% level? It’s up to the individual and the market to decide (not financial advice), but are you willing to be the spoiler or wait and hope not to be spoiled?

The first step has been completed and other currency pairs are following suit. Shortly after USDC/ETH TVL jumped, USDT/ETH (2nd most popular ETH pair) doubled its TVL by 0.05%, while WBTC/ETH (4th most popular) ~300x! DAI/ETH is the 3rd most traded ETH pair, but 0.05% TVL has not yet taken off! ……

Mobility Competition: Uniswap v3 Fee and Bottom-to-Bottom Competition

(Uniswap v3 info – WBTC/ETH 0.05% TVL)

In the long run, I wouldn’t be surprised to see the 0.05% level exceed the 0.3% level of the most popular pairs. the 0.3% level could also flip the 1% level of the marginal pairs and could eventually reach 0.05% as well. Outside of the crypto world, we know that competition favors the end consumer. Now we see it at work in Uniswap. more competition among LPs brings better prices for traders, which brings more demand for trading in Uniswap, which attracts more LPs and more competition, which brings better prices and soars for traders.

Well, soar to a certain point (for now). Once you get down to the 0.05% fee tier, there is nowhere to go. At this point, the benefit of scale, and the ability to aggressively choose the most accurate price range, is how LP differentiates and competes for fees. So, to keep growth soaring, and to make it spin even faster, we can look for areas where more LPs can differentiate themselves from their competitors.

Fee tiers: Offering multiple fee tiers is a new innovation in Uniswap v3, and now that we’re seeing it in action, we can consider what the next step is. As the market evolves, there should be some optimal balance of fee tiers, trader demand and LP returns. Perhaps the ideal market rate is somewhere between 0.3% and 0.05%? Maybe less than 0.05%? Now that we know that fee tiers work, the next step might be to make them more flexible.

Incentives: What else can LPs (liquidity providers) offer to incentivize traders to trade with their liquidity? Today, traders don’t know how liquid they are trading, but imagine that one day they could. Maybe I offer liquidity at a 0.05% fee level, but I also give back 0.01% in the form of some sort of token? This could be Uniswap’s UNI token, or maybe some LPs are other businesses or protocols and have their own tokens to offer? Then again, traders may not only want the best price, but also the best return. uniswap’s competitor Balancer already offers traders a BAL token equivalent to the cost of gas per transaction, and (back in ecommerce) retailers offer loyalty programs to attract and retain customers forever. What other value can be offered to traders once prices level off?

I’m looking forward to seeing what happens next. But until then, the 0.05% grade is coming.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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