Consensus Check - Should Uniswap incentivize Liquidity on Optimism and Arbitrum

Consensus Check
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Reasoning for rewarding full-range is it will remove the confusion around setting ranges for newer users. Full range also encourages long term passive liquidity providers and will attract v2 uniswap liquidity providers who have not switched to v3.

Full range liquidity is obscenely inefficient --as is Uni v2 for that matter ;).

The Full Range option in Uniswap v3 splits the liquidity equally between all 1,774,544 ticks between MIN_TICK and MAX_TICK. In other words, it covers all possible prices from 3e-39 to 3e+38. That means capital efficiency will be >170,000 less than single-tick liquidity for the 0.05% pools.

I proposed in another post that liquidity mining should incentivize a capital efficiency of at least 2x over UniV2/sushiswap.

Recall that capital efficiency for a range [Pa, Pb] can be calculated as follows:

C.E. = 1/(1-(Pa/Pb)^0.25)

So when Pa/Pb = 1/16, the capital efficiency is 2. This corresponds to a range [K/16, K*16], where K is the midpoint of the position K=sqrt(Pa * Pb). So the range would be [300, 76000] assuming a starting price of K=4750.

Since most assets won’t 16x in either direction in 3 months, the C.E. = 2 may be too large.

The 3 months expected move is +/-33% assuming a ~66% annualized volatility, which corresponds to a capital efficiency of 7.5x over UniV2 (nice!). The exact range could be adjusted: for example the one-month expected range would be +/-19% with a 12x increase in capital efficiency, etc.

The expected move calculation predicts that the asset should remain within the prescribed range about 68% of the time. So the price will end up outside that range after 3 months about 32% of the time. This will require a rebalancing event from the LPs, but that’s probably OK because gas on L2 is much cheaper.

And to prevent all liquidity from becoming out-the-money at the same time, users should be to choose any midpoint K they wish.

Here are some choices for users deploying to the 2 ETH worth of liquidity to the ETH-Dai-0.05% pool at +/- 33% range:

  1. Neutral position: Deploy with K = 4750 and lock 1 ETH + 4750 Dai between [3571, 6317]
  2. Bullish position: Use K = 6317 and lock 2 ETH between [4750, 8402]
  3. Bearish position: Use K = 3571 and lock 7142 Dai between [2685, 4750]
  4. Neutral-to-Bullish: Use K = 5500 and lock 1.5 ETH + 2425 Dai between [4135, 7315]
  5. …

The liquidity mining rewards will be distributed equally to all those participants as long as the price is within their prescribed range.

Overall, that would still allow users some agency in how they manage their capital while still preventing LPs with ultra-narrow ranges to collect all the LM rewards.

At the end of the day, rewards will be proportional to the deployed liquidity for the minTickers. Everyone’s happy, except maybe the 1-tickers, but they will still collect a large fraction of the fees on their ultra-concentrated positions.

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