In the previous post Uniswap V3's LPs are struggling with ongoing losses.Whether DeFi would be a lifesaver for LPs ?, as we mentioned that most LPs in Uniswap V3 suffered long-term losses under the U standard. But we still found some pools with good yield. We speculated that this kind of pool is usually not a stable-coin pool or a large TVL pool because the dual token price of these two pools is more stable and the risk of holding tokens is lower. Meanwhile, higher liquidity of the pool leads to lower average fees.
We believe that LP mining in the small and medium-sized pool is because these pools bring higher fees due to the scarcity of liquidity. Also because they’re optimistic about the altcoin in this pair . Use high fees to reduce the risk of token price fluctuation, or use the "grid" mode of AMM curve to automatically “sell high” and “buy low” action, which can be seen as a way of speculation in a different form. In addition, the institution will also provide a large amount of liquidity for the pools of original utility coins and stable-coin issued by it to improve market liquidity.
To confirm this view, we first analyze from the perspective of mining yield. Let’s take July 2022 as an example, we found that the distribution of LP mining yield of the pool does not simply follow the normal distribution, and the kurtosis values of different pool distributions differ greatly. The kurtosis reflects the cusp of the peak of a distribution. When the kurtosis is greater than 3, the distribution presents the shape of steeper peak and tail than the normal distribution. When the mining yield of LP in the pool does not show a normal distribution, it indicates that LP’s yield is often greatly affected by its strategy, and only a small part of LPs can obtain high mining yield. In short, the competition of fees in the pool is fiercer . It can be seen that from the largest mining pools in TVL, WBTC-WETH 0.05% is the most competitive followed by USDC-WETH 1.0%, USDC-WETH 0.3% and USDC-WETH 0.05%.
Based on the hourly PnL of all the positions in Uniswap V3, we calculated the monthly PnL of each pool from May 2021 to November 2022. According to the distribution of APR of each pool every month, there is a clustering situation of returns of the pools in different months. For example, the overall distribution of August 2021, October 2021 and July 2022 is high.
The token price of the pool with less liquidity may be inflated by the initial liquidity provider and it’s not actually liquid. Therefore we select the pools with an average daily TVL of more than $1 million for analysis (Appendix 1). Among the 61 records of the top three pools with monthly returns, we found that only 5 pools have an average daily TVL more than $10 million. Among them Nvir-WETH 0.3% pool recorded the highest amount of TVL per day in March 2022 of $77.76 million which confirm the hypothesis that small and medium-sized pools have the highest yield.
From the perspective of fees, there are 35 records with annual returns of more than 100% and 22 records with more than 300% . However there are only 21 records whose fees rate of return accounts for more than 50% of the net return and 27 records whose fees rate of return accounts for less than 20% of the net return. This indicates that even though the overall fees of this kind of pool have a high yield rate, the positive IL caused by the rise of the actual token price is the biggest factor affecting the yield.
In addition, it is not difficult to find that 95% of the pools in the list contain WETH or stable coins of USDC, USDT, DAI and FEI . While the two pools WETH-LUNA 1.0% and KROM-WETH 0.3% comes up the most frequently which is three times in total .
We also did the distribution of mining yield in the pools with the highest net returns in July 2022 . It shows that the kurtosis value of other pools is generally not higher than that of large pools except MM-USDC 1.0% which also reflects that LPs are easier to obtain high yield from some potential small and medium-sized pools.
Most of us have witnessed the sudden explosion and rapid change of many tokens down to zero in the blockchain world including the collapse of the largest algorithmic stable coin UST and LUNA . LPs still remain on the sidelines about the future of some tokens. For them, it is risky to directly hold the tokens that they don’t have a positive attitude in the long run. This mechanism helps them actively switch altcoin into Ethereum or stable-coins when the price rises. Meanwhile the high fees of small mining pools partially offset the IL caused by the falling price, which make the market risk far lower than the risk of just holding the tokens.
In the high-yield pools we found some smart addresses . Taking this LP’s operation (0 x7bbe7140e8f62404d320c87fa1655f69b2cb2f26) in FXS-WETH 1.0% as an example , after WETH and FXS experienced a drop in April and May 2022, the token price stabilized in June. This address started to create positions at the end of June 2022. The strategy is to set a neutral range for a single position, setting the width of the range at about 5%-20% above and below the current price . And to switch positions when the price falls below the floor or rises above the ceiling. Moreover the width of the next position will refer to the price fluctuations in the past period of time which indicates that this LP has no clear tendency to the future price trend and volatility . But it is bullish on this pair in a period of time. Taking the net value of the first injection of capital as the initial principal, we plotted the trend of the net value per unit of the LP under its strategy and the trend of the net value of the two tokens held by half of the principal at that time. We found that the strategy was significantly superior to the token holding strategy. The latest total net value in the pool reached 1.6 times of the beginning while the net value of the token holding strategy was basically the same as the beginning.
From the pool of tokens with the top 10 monthly returns and positive net returns, it is found that in addition to the major coins paired with altcoin including WETH and Stable-coins, AVINOC/ SHIB/ APE and other coins have a high frequency come up in the rankings. And some of them are similar to LUNA. At the same time, we also found the monopoly phenomenon of some small-sized pools. For example, the three largest pools related to AVINOC are suspected to be the same institution ( Appendix 2) which may be the institution issuing AVINOC. Some institutions can also make altcoin circulate quickly by providing a lot of liquidity, thus driving up the token price.
