Uni v3 x [DAO] Carlos Mercado Product Manager – Take Home Assignment Images taken from my article on UNI v3 Agenda • Uni v3 Refresher • Product Opportunity • Features • Stakeholders • Success Metrics Uniswap v3 Refresher Individual trades have implied prices • When people trade between assets, they have a desired trade. • This desired trade creates an implied price • Wanting 100 ETH for 5 BTC, implies 1 ETH = 0.05 BTC. Providing liquidity generates cash flow • People can put their assets to work in exchange for swap fees by providing liquidity between the assets. • This requires providers to be indifferent to how their assets are allocated. • $1 of A = $1 of B Problem: people are not always indifferent 1. Swapping between assets incurs transaction costs 2. Assets grow at different rates 3. AMM liquidity pools (by design) sell rising assets for falling assets 4. Traditional AMMs ignore individual preferences Result: Uncertainty drives poor UX • Average user must balance swap fees earned relative to the opportunity cost of holding the asset. Time passes • AMMs pay providers to take on losing trades (by design). • Fundamentally doesn’t make sense: losing money while providing a key service? *Note: UNI constant product does not hold b/c swap fees are included UNI v3 (marginally) Improves UX • Gives providers an exit* when prices go beyond their comfort zone • Allows providers to infuse their preferences into the boundaries *Technically, due to AMM design, the exit is to go 100% into the asset they don’t prefer. But it introduces complexity in exchange 1. User only generates swap fees for trades within their range. 2. The swap fees are not a simple proportion of total liquidity. UNI v3 rewards correctness of boundaries • This introduces the opportunity to generate capital efficiency (i.e., ROI) through optimization of price forecasts and boundaries (net transaction fees). • Also introduces new attack vectors. • Miners flash liquidity at exact prices when large trades are found in the mempool to extract near 100% fees. 0 Product Opportunity Product Opportunity: Context • Both institutions and retail want to generate cash flow (swap fees) in excess of transaction fees and opportunity cost (i.e., Impermanent Loss). • Virtually all UNI v3 users are simple and/or passive in positioning* In total, we find that there are 22,864 unique addresses who own/had owned positions on Uniswap V3. A large proportion (77%) of these owners are still considered passive liquidity providers. This means they have almost never changed their liquidity positions after minting them. 14% of owners are classified as “Simple Active”, while less than 1% are “Complex Active”. *https://www.nansen.ai/research/the-market-making-landscape-of-uniswap-v3 | July 13, 2021 Product Opportunity: Market Landscape Existing players in the space include: Visor Finance: Gamma Charm Finance: Alpha Vaults • Use Bollinger bands to actively update • Uses concentrated liquidity to positions boundaries. maximize fee revenue. • 10% of fees buy VISR which is paid to • Uses one-sided narrow range-orders stakers; 90% re-invested. to target 50/50 when concentrated liquidity gets biased. • Saves on swap costs when explicitly rebalancing. • 5% fees go to Charm treasury. Product Opportunity: S.E.T. • Social: UNI v3 has driven a major narrative around ‘4000x’ capital efficiency and the position is stored within an NFT- another ongoing social trend. • Economic: UNI v3 has launched on Optimism, bringing reduced transaction costs for retail users (estimated 90%+). This will drive users to UNI v3 on both the L2 and ETH L1. • Technological: Smart contracts can interact with UNI v3 on L1, while L2 is pending non-EOA interactions. Current market for Uni v3 mgmt tools is small. [REDACTED] can leverage its size and brand to build a UNI V3 management product that (1) fills gaps in existing management products, (2) leads the way on a new cost-friendly layer 2 solution. Product Features Features: User Interface & trivial UX fixes • Interacting with UNI v3 is not simple. • No embedded historical data on relative A/B prices to support boundary setting • Must use 3rd party services like CoinGecko, but often limited to X/ETH, X/BTC, X/USDC • The UNI v3 simulation tool is highly complex and does not include any forecasts based on user defined historical data • How would boundary[A] have performed over last N days? • Solution: Interactive visualizations of historic bounded liquidity and trade volumes for selecting and forecasting swap fees under various potential market conditions. • By design AMMs sell winners to buy losers, thus UNI v3 “emergency exit” pulls liquidity 100% in the asset not preferred by user. • Solution: A custom exit can as a stop-loss by swapping token at floor price. • Result: minimum viable product for using UNI v3 as-is. Features: Community-Driven fractional positions • Use wisdom of the crowd to allow users to pool funds (reduce Tx cost) and generate multiple positions based on their overlaps. • Users would receive multiple (fractional) tokens covering their desired range Person Lower Bound [ETH/BTC] Upper Bound [ETH/BTC] Range Tokens Received Carlos .025 0.1 Medium EBM1, EBM2, EBH1 Sade .05 .075 Narrow EBM2 Jasmine .01 .5 Wide EBLO, EBM1, EBM2, EBH1, EBH2 EBLO EBM1 EBM2 EBH1 EBH2 0.01 – 0.025 0.025-0.05 0.05-0.075 0.075-0.1 0.1-0.5 Result: Provides an ERC-20 with a net asset value, backed by UNI v3 NFTs, that each generate extreme capital efficiency Features: Mint / Redemption • Minting and Redeeming of tokens EBLO EBM1 EBM2 EBH1 EBH2 0.01 – 0.025 0.025-0.05 0.05-0.075 0.075-0.1 0.1-0.5 Supply: 1 2 3 2 1 • Mints would be generated in bundles, e.g., when total amount of funds reach a Person Tokens Received minimum value to validate gas costs. Carlos EBM1, EBM2, EBH1 • Redeems would simply return proportional UNI v3 NFTs + fees (which are already separated by UNI v3); could also include 1-button NFT burn for UX. Sade EBM2 • Benefit: NAV is stable for out of range tokens (out of range is 100% one token + Jasmine EBLO, EBM1, EBM2, EBH1, EBH2 proportion of total earned fees). • Risks: Difficult to generate liquidity between tokens & common asset (The ERC-20 inherits the difficulty of generating liquidity for any NFTs). • Possible solutions: Allow collateralization & liquidation of tokens to simulate market makers. (Potential partnership with AAVE as they consider NFT collateral). Features: Direct liquidity for popular ERC-20 • The ERC-20 tokens backed by NFTs are inherently gaining value from (separated) fees. • The most popular positions (e.g., ETH/BTC 0.05 – 0.1) can have incentivized liquidity. • Possible to copy Charm & re-invest the fees using near-price range orders to rebalance the position (and increase NAV). Stakeholders Stakeholder to consider • High Capital Institutions • Have the most extreme time-horizons (high frequency & multi-year) • Very sensitive to opportunity cost (e.g., IL) • Position size makes gas negligible • Interested in auto-reinvesting ERC-20s for most common ranges (e.g., ETH/BTC 0.05- 0.1 with reinvested fees). • Lower concern for liquidity (can afford to redeem or OTC trade at near-NAV) • Low Capital Retail • Medium to low time-horizons (chasing the next big thing) • Gas costs are an extreme concern (transaction costs eat into gains) • Benefits the most from transaction bundling to share gas costs. • Higher concern for liquidity (less access to OTC, costly to redeem) Stakeholder to consider Additional stakeholders • Community potentially providing liquidity to the most common range tokens. • Arbitragers that keep assets liquid at near-NAV • [REDACTED] investors who need to generate streaming revenue from the mint/redeem processes • Users uninterested in community tokens that just want solo UNI v3 management • Uniswap – need to be aligned and symbiotic to their product and retain contract access to protocol. • Optimism – if launched on L2, coordinate on non-EOA access to protocol. Success Metrics Success Metrics Product Specific Metrics • Consistently beating IL & Uni V2 • Breaking apart wide ranges into narrow bands should generate capital efficiency above a single widest band (net the narrow bands being out of range!) • Impermanent loss is a standard concern for any cash flow reliant on AMMs that sell winners to buy losers. • Market Fit • Addresses that contribute to bundles (& growth in those addresses) • Total value minted/redeemed (over time, by address, in-range vs out, etc.) • Range coverage (are bands too narrow? Avg. lifespan of out-of-range tokens before redeemed) • Revenue Metrics • Standard: TVL, Revenue / TVL, Revenue / Time, Revenue by range (i.e., narrow vs wide) • Market acceptable fees (Visor does 10%, Charm does 5%; what is the revenue elasticity of fees)
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