Optimal LP Width in Bull/Bear Markets

We simulated LP performance on the ETH-USDC 0.3% pool. Here's what did best.

We analyzed simulated LP performance on ETH-USDC 0.3% pool.

Results were surprising: 📢 The optimal width was wider than expected.

• What's the optimal width for max returns?

• How does that change for 🐂 vs 🐻 markets?

Find out 👇

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The strategy is simple:

• 💦 LP around the current ETH price with ±X% width

• ⚖️ Rebalance your LP position after a day, week, or month (you pick)

• 💵 Collect & compound your fees!

Our analysis includes >1.5 years of data (Jun 2021 - Jan 2023)

On 5 different range factors:

• ±5% (r = 1.05)

• ±20% (r = 1.2)

• ±50% (r = 1.5)

• ±75% (r = 1.75)

• ∞ (UniV2 full-range, r = 1000)

Which one did best?🤔

Panoptic @Panoptic_xyz

1/13 Read our latest #ResearchBites from @brandonly1000 of the @Panoptic_xyz research team! ===== How do you LP on UniV3 with a ±% range? E.g. if you wanted ±30% should you do: 1) Lower: P * 70% Upper: P * 130% or 2) Lower: P / 1.3 Upper: P * 1.3 Let's find out!👇

For the FULL period (Jun 2021 - Jan 2023):

• Daily rebalancing: r* = ∞ (full range)

• Weekly rebalancing: r* = 1.5

• Monthly rebalancing: r* = ∞ (full range)

LPs end up w/negative returns for this pool, but were raking in $ during the bull market (~40% returns in < 6 months)

For the 🐂 market (Jun 2021 - Mar 2022):

• Daily rebalancing: r* = 1.5 - ∞

• Weekly rebalancing: r* = 1.5

• Monthly rebalancing: r* = 1.75

LPs end up positive! (~20% returns in 10 months)

For the 🐻 market (Apr 2022 - Jan 2023):

• Daily rebalancing: r* = ∞

• Weekly rebalancing: r* = 1.75 - ∞

• Monthly rebalancing: r* = ∞

LPs end up negative (-24% returns in 10 months, but compare that to -55% returns on ETH!)

During 🐂 market, optimal range was tighter (r = 1.5 - 1.75). But during 🐻 market, optimal range was wider (r = 1.75 - ∞). Here's why 👇

Tight range:

• 🤑 "Greedy"

• 🚀 More fees! (~6,000% cumulative fees in 1.5 years, r = 1.05)

• 💩 Buy losing asset faster, sell winning asset faster

Wide range:

• 🦺 "Safe"

• 🚀 Buy losing asset slower, sell winning asset slower

• 💩 Less fees (16% cumulative fees, r = ∞)

There's a tradeoff in choosing r:

• ⬆️ fees ⬇️ payoffs

  or

• ⬇️ fees ⬆️ payoffs

@guil_lambert has a good "Guide For Choosing Optimal Uniswap V3 LP Positions" 👇

• ✅ Gives probability of landing ITM

• ❌ Doesn't account for where we land ITM

• ❌ Doesn't account for time spent ITM

Caveats:

• ⛽ Ignores gas & rebalancing fees

• 📈 Assumes fees/returns compound day-over-day

• ⚠️ Past performance is no guarantee of future results!

Questions:

• 🌊 What about other pools? (🦄, ₿, SHIB, ...)

• ⚖️ What about stablecoin pools?

Guillaume Lambert | gee-yohm.eth | 🦇🔊 @guil_lambert

Well it turns out ALL performed extremely well: 700% returns for the long/vanilla LP strategy over the past 2 years! Even the short strategy gained 400% What's going on here? Why are returns so high?

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Disclaimer:

• 📢 None of this should be taken as financial advice.

• ⚠️ Past performance is no guarantee of future results!