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Optimal LP Width in Bull/Bear Markets

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Optimal LP Width in Bull/Bear Markets

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

Brandon
Mar 20, 2023
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Optimal LP Width in Bull/Bear Markets

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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 👇


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?🤔

Twitter avatar for @Panoptic_xyz
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!👇
Image
9:00 PM ∙ Jan 18, 2023
20Likes5Retweets

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 = ∞)

Image

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?

Twitter avatar for @guil_lambert
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?
Image
6:57 PM ∙ Jan 27, 2023

Disclaimer:

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

  • ⚠️ Past performance is no guarantee of future results!

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