Uniswap V3 offers the possibility to pick between many different pools, with different coins, on different networks (Ethereum, Optimism and Arbitrum) and with different properties (different fee tiers for example).
Understanding the characteristics of each pool and being able to compare them is a key step for designing the perfect Uniswap V3 Strategy.
At DefiLab we tackled this problem by identifying three indicators to gain a better understanding of any Uniswap v3 pool.
Volatility
Volatility is a standard financial indicator used to measure the degree of variation of prices over time.
We calculate volatility as following:
This measure is commonly called the relative standard deviation.
Different levels of volatility suggest very different strategies for Uniswap V3:
- Very low Volatility levels (<0.2%) are typical of pools with similar tokens. For example, stable to stable (USDC-DAI) or different representation of the same token (WBTC-renBTC). A sensible strategy in these cases would be to adopt a narrow range to take advantage of a high concentrated liquidity Multiplier.
- Higher Volatility levels are typical of stable to token (WETH-USDC) or token to token (WETH-WBTC) pools. Higher Volatility calls for a wider range strategy (so that the our ranges can “absorb” the sudden changes in price and continue earn fees), or more advanced strategies with frequent rebalancing (so that the range can be adjusted often to the new levels of pricing).
Active Liquidity 24h Fee
Active Liquidity 24h Fee represents the fee earned by one unit of investment (example 1 USD) deposited in the perfect range.
We define as perfect range the strategy where min=24h Low and max=24h High.
We calculate the Active Liquidity 24h Fee as following:
This indicator allows us to quantify the activity of pools, giving us the possibility to compare similar pools.
For example, we can analyse the performance of the same pair on different networks.
Or we can check the same pair in different fee tiers:
Concentrated Liquidity Index
The Concentrated liquidity Index measures the percentage of liquidity that is concentrated in the range where:
Min = current price - 1 standard deviation (1STD)
Max = current price + 1 standard deviation (1STD).
It can be expressed as following:
Visualised like so on the liquidity chart:
The Concentrated liquidity Index is a measure of the pool’s competitiveness:
- High levels of Concentrated liquidity highlight that the majority of the liquidity is concentrated in the vicinity of the current price. The majority of the fees will be captured by highly concentrated positions, therefore a strategy with wide ranges might be not ideal.
- Lower levels of Concentrated liquidity are typical of less competitive pools. In these cases wider ranges could prove to be a good strategy.
Conclusions
We use these indicators internally to analyse and categorise Uniswap V3 pools based on their characteristics, supporting us to define our own strategies.
We hope to improve and evolve these over time, and would love to start a conversation with the Uniswap Liquidity Providers community to confront our ideas with the experience of other users.
