Uniswap v3 RAI Liquidity

Last week we started an incentives campaign targeted at RAI/DAI LPs in Uniswap v3. Details can be found here.

Up until now, RAI/DAI TVL has stayed flat. There are a couple of reasons this might be the case:

  • People don’t know that you can provide liquidity at the redemption price without including the market price
  • Finding out the redemption price denominated in DAI is hard and confusing
  • People don’t like active LPing and prefer to stay on the sidelines

There are a couple of things we could do at this point:

  • Stop the campaign and wait for more advanced Uniswap v3 tooling built by the community
  • Add more details in our docs and explain that you can LP at the redemption price without including the market price
  • Add the redemption price denominated in DAI in our bot feeds on Twitter and Discord
  • Require that people LP at the market price instead of the redemption price

The last option is interesting but comes with other challenges:

  • The redemption price is more intuitive to LP around. It moves slowly and it’s fairly predictable. The market price, not so much
  • There are scenarios where the market can move RAI’s market price to $5, or $2.5 or $10, add all the liquidity at that price and leave very thin liquidity around the redemption price

I’d love to hear what you all think. We should find a solution and test it for a while more or pause the campaign.

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I think the capital efficiency gains from Uniswap v3 are a huge plus and could bring a lot of stability to the RAI/DAI price vs allocating the same capital to v2 pools.

TLV hasn’t lived up to what had been hoped (so I gather, not sure if KPIs had been made public) despite attractive APY. Personally I’ve been following Reflexer closely, had read the docs and distros on github and had the wrong impression of the mechanic. I would assume I’m not the only one and that has held back v3 participation.

I reckon option 2 and option 3 are the best approach in the short term and then reassess v3 incentives campaign.

Would also help if we can provide some indication of APY for folks to gauge before jumping in. Obviously each users APY would differ based on their position but maybe something standardised like “mint 1000 RAI, LP 1000 RAI, at range between 3.00 and 3.05, APY at current market conditions is X” and have it updated daily? Not sure whether that would be possible or not though…

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A small observation on Uniswap V2, regarding if it’s worth migrating all incentives over at some point:

Uniswap V3 is $5m liquidity (RAI/DAI + RAI/USDC) => $17m in 7 days volume
Uniswap V2 is $30m liquidity (RAI/ETH) => $1.3m in 7 day volume

That means that V3 is 79 times more capital efficient lol

On V3, I support having liquidity provided around the market price instead of the redemption price. I wouldn’t be comfortable if the majority of liquidity ends up around the redemption price. You end up with very high slippage once the prices diverges. Prices would be more volatile and bounce heavily in one direction.

Does the liquidity away from the market price really matter since it’s inactive ? I don’t think more a less liquidity a specific price point helps in anyway at forcing the prices to converge. It just impacts volatility.

Assume Uniswap v3 RAI/DAI is the largest market for RAI. Market price for RAI trades at a 3% premium for 3 months. All liquidity goes at that price. Redemption has no liquidity. What do?

If it’s a choice between volatility and not having liquidity where the price should return, I prefer the former.

Current premium is 3%, let’s split the 2 scenarios:

  1. Most of the liquidity are concentrated around the Redemption price =>
  • Current liquidity are low, price is volatile
  • You need to sell X1 RAI to return to the redemption price.
  • You need to sell Y1 RAI to get half way to the redemption price (Premium from 3% to 1.5%)
  • Risk: Easy for the premium to go even further up (In the opposit scenario where RAI would trade at Discount, this could trigger a bank run).
  1. Most of the liquidity are concentrated around the Market price =>
  • Current liquidity are high, price is less volatile,
  • You still need to sell the same amount of X2 RAI to return to the redemption price.
  • You need to sell Y2 RAI to get half way to the redemption price (Premium from 3% to 1.5%)

We still have X1 = X2 so no advantage here.
However, we have Y1 < Y2 due to the Gaussian nature of liquidity distribution. This might be the only advantage for 1.

I don’t think the campaign was widely understood. In a scientific manner, I think both forms of liquidity are actually helpful.
1). Liquidity on v3 that is at market and active
2) Liquidity around redemption to help guide toward the redemption price. Or at least prevent sell walls.

Could the incentive be split?

Splitting would be super confusing.

X2 in both scenarios is not the same. If liquidity is near zero where the price is, it’s extremely easy to move it vs having millions in the nearby ticks where I am.

That why I differentiated X and Y. If you want the price to go back all the way you would need to sell as much in both scenario.
In 1. the price would move slow at start and fast later. In 2 the price would move fast at the beginning and slow later.
But the overall cost is the same.

I would need to draw something to prove it.

An underrated aspect of the Uniswap V3 liquidity mining program making things more complicated. The LP + Mint requirement means that the underlying RAI of your LP position should be minted. So

  • If market price > redemption price => You are likely 100% DAI Means you don’t need to mint anything.
  • If market price < redemption price => You are likely 100% RAI Means you need to mint twice as much.

I’m a propent of simpler Uniswap V3 incentives on the RAI/ETH pair, and think we should be focusing energy there as opposed to RAI/DAI. I don’t think it makes sense for RAI to have a competitive advantage in its collateral pool (ETH), yet have the majority of liquidity centered around DAI.

I think to support RAI/ETH on Uniswap V3:

In the short-term => Remove incentives on the Uniswap V2 pool. These are the target market LPs for Uniswap V3, so they need to move over.

In the long-term => Create a canonical wrapper contract around Uniswap V3 that LPs around the redemption such that LPs have a similar experience to V2.

I would also love RAI/ETH but the majority of LPs don’t agree with you unfortunately…

Laziness + fear of IL stops many from LPing.

The majority of LPs are in Uniswap V2 RAI/ETH. So they fear concentrated liquidity?

It makes sense but RAI/ETH is very high IL risk on V3 while RAI/Stables are low IL risk.
From a liquidity perspective, having trades routed through a stable is fine. We let USDC/ETH and DAI/ETH LP taking all the IL risk.
From a fee perspective, you pay twice 0.05% which is still better than 0.3%

We implemented that. However, we decided to put it hold for now because (i) the contract is high risk and (ii) the situation around the V3 ecosystem is evolving fast.

Collaboration with Charmfi? Turn their alpha vault’s base_order into redemption_price_order and rebalance_order into market_price_order

Lemme reach out to them.

I want a simulator which calculates liquidity share at redemption price for input price range and capital amount.

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Great discussion. Uniswap v3 can be very intimidating, but the benefits for stable pairs are great.

If we want to move ETH/DAI LPs from v2 to v3, we should wind down incentives for ETH/DAI on v2 and move those allocations to v3.

Instead of incentivising the redemption price only, we could establish rewards based on the ranged LPs have allocated their RAI/DAI to. The largest FLX rewards would be around redemption price, and rewards would increase the closer LPs were to redemption price.

We could define ranges based on the liquidity ranges within v3 and make a caveat that LPs who include multiple ranges will get the average % in rewards for FLX between those ranges rather than multiplying FLX rewards for opening a position across several price ranges.

Offering an FLX bounty for someone who can create a comprehensive guide on adding RAI/DAI to an LP on v3 would be great as well. An easy-to-understand guide with an explanation of how it works and how to create NFT positions that you can utilise when the price moves.

Either or both of these could work, though the implementation of such a rewards system may be difficult. Just thought I’d throw that out there as well.

I think providing a guide in v3 positions would help deduce the misunderstand in providing LP. Including those positions on the website would encourage more participation. Win win

First time posting here but just started to get into rai. Uniswap v3 pools are confusing to people and at times even to me. Maybe rai strategy video may help explaining what is the best strategy, when, and why. Just a suggestion.