Now that the Uniswap v3 license has expired, it’s time to fork the Centralized Liquidity Automated Market Maker (CLAMM), and in this article we’ll explore:
1. What does it mean?
2. Why is it important?
3. Challenges
4. Solutions
5. Industry structure
6. CT coverage
7. My strategy
0 Preamble
For crypto beginners, Uniswap is the largest decentralized exchange (DEX) by volume since its inception in 2018, with trillions of dollars in trading volume. The Uniswap v2 AMM sets the standard for most decentralized exchanges with its popular classic pool model xy=k (constant product formula).
The classic pool is designed for general-purpose transactions, supports almost all assets, and maintains a 50%/50% reserve between two tokens.
You may have heard the term "bonding curve" before. A bonding curve represents the relationship between two tokens utilizing the xy=k formula.
Why do I need to know this? The formula establishes a range of prices for two tokens based on the available quantity (liquidity) of each token. When the supply of token X increases, to maintain a constant product K, the supply of token Y must decrease.
For example, a trader wants to trade DAI with 1 ETH in ETH/DAI LP. First, a trader might trade 1 ETH for $1,900 DAI, but a second trader who trades 1 ETH for DAI will not get the same amount of DAI. Because the token supply of DAI decreases while the supply of ETH increases.
There are two main problems with this AMM model:
l Low Capital Efficiency - Typically a large amount of liquidity is required to achieve the same level of price impact as an order book based exchange. Liquidity is spread across every price point and utilization is low.
l Temporary Loss - The difference in value between depositing tokens into an AMM vs. simply depositing those tokens in a wallet.
Several improved versions of the AMM were introduced:
l Curve StableSwap AMM - designed for stable assets
l Sucmadex's Dynamic AMM (DAMM), sorry, Sigmadex
l Active market maker (PAMM), DODO
l Virtual AMM (vAMM), Perpetual Protocol
l MAAM, the way I am called (don't ask why)
But none are as capital efficient as Uniswap v3.
1. Introduction to Uniswap v3
l Centralized liquidity - individual LPs can freely control which price range their capital is allocated to
l Multi-tiered rates - allowing LPs to obtain compensation for different risk levels
Centralized liquidity is a breakthrough As the name suggests, previously unused liquidity in v2 can be centrally utilized in v3. LP can concentrate liquidity in the desired price range ➜ Because all liquidity is utilized, the handling fee is greatly increased Increase
Example image: https://twitter.com/i/status/1646909132480581632
For example:
Alice v2 strategy - $1M LP ➔ 50% annualized return after 12 months
Bob v3 strategy - $183k LP ➔ 314% annualized return after 12 months
With centralized liquidity, Bob's v3 position is more efficient
Bob's custom position also acts as a stop loss for his liquidity. If the ETH price drops to $0, Alice and Bob's liquidity will be all denominated in ETH. Bob loses $183,000, Alice loses $1 million, and Bob can spend the remaining $817,000 on other strategies.
2. Why is it important?
Since Uniswap v3 has greatly improved capital efficiency compared to v2, and the Uniswap v3 license has expired, every decentralized exchange can now fork and use v3
• @PancakeSwapv3 is live
• @CamelotDEXCLAMM is live
• @ThenaFi_ coming soon with CLAMM
3. Challenges
When every DEX implements Uniswap v3, LPs should be happy because fees and APR will go up, right? ...Right?
Not necessarily - when liquidity is concentrated in a specific price range, impermanent losses can be exacerbated (>4x IL) if the price falls outside the range.
To meet this challenge, users need to closely monitor the price of LPs, withdraw liquidity, and place it into a new price range.
It's time consuming and fuel consuming, and we can make mistakes setting new price ranges.
4. Solutions
What if you could have a professional manage your LP for you? Introducing the "Liquidity Management" protocol. These protocols employ strategies that actively adjust liquidity parameters represented by LPs, automatically managing price ranges, rebalancing and reinvestment fees.
5. Market structure
@ArrakisFinance dominates the market with over $200M in total value locked. Arrakis has launched a variety of products for different user groups:
• Arrakis V1 - Basic LP strategy for retail clients
• Arrakis V2 - Advanced Strategies for Professional LPs
• PALM - like facepalm
When digging into this topic, my first reaction was exactly
• PALM - protocol automatic liquidity management, the solution is to guide the TVL of the protocol, without the need to acquire basic assets (USDC, USDT)
➙ LP can start from 100:0 ratio, PALM will adjust to 50:50
How does Arrakis make money?
• Arrakis V1: 2.5% of transaction fees earned on deposited funds
• Arrakis V2: No agreement fees
• PALM: 1% quarterly management fee and 50% performance fee of transaction fees earned on Uniswap, owned by treasury managers.
Currently Arrakis has no tokens, but there are rumors about a future $SPICE Airdrop (Arrakis governance token). To qualify, provide LPs via Arrakis or hold $GEL tokens (Arrakis is incubated by Gelato Network)
In addition to Arrakis, there are multiple liquidity managers starting to accumulate more TVL. @GammaStrategies recently partnered with @ThenaFi_ and @CryptoAlgebra to create FUSION - ve(3,3) w/ CLAMM.
Gamma differentiates itself by partnering with multiple DEXs such as Quickswap, Zyberswap, Thena, etc.
100% of 10% revenue from LP transaction fees is distributed to xGAMMA stakers. There is no lock-up period for staking, and the revenue is used for buyback and distributed to xGAMMA stakers.
Here are projects (with tokens) that benefit from liquidity manager narratives (filtered by market cap)
My picks are $GAMMA and $ALGB - both top liquidity managers, with @CryptoAlgebra providing solutions for 11 Dex. The MCap/TVL and FDV/TVL of the two selections show that they are undervalued compared to their peers.
6. CT coverage and hype
Liquidity management and the Uniswap v3 narrative have gotten a lot of attention since the last week of March and first week of April, including @QuantMeta, @resdegen, @Crypt0_Andrew, @DaoChemist and several others focusing on these two options. Overall, they're still a bit low-key, but with the Shapella upgrade complete, I expect CT to redirect funds to other exciting narratives, and liquidity managers may be one of them.
7. My strategy
In addition to liquidity managers ($GAMMA, $ALGB), several DEXs are working on implementing Un v3 • $THE (first stable fork with CLAMM • $MAIA / $HERMES (Metis -eco narrative, extended to Arb) plan to start DCA on both
