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Uniswap v3 has significantly improved capital efficiency compared to the constant product AMM. However, this improvement comes at the expense of user-friendliness, meaning that liquidity providers (LPs) have to deal with complex tasks such as setting price ranges and frequent rebalancing. To solve this issue, several liquidity management protocols have been launched that offer optimal liquidity strategies for Uni v3 to retail LPs.
In this article, we aim to provide an overview of the liquidity managing vaults for Uni v3 in the current DeFi space and introduce the unique features that Orange Finance will offer.
(Disclosure: In order to maintain transparency and clarity, it's important to acknowledge that this article may contain a certain level of bias as it aims to showcase the unique advantages of our protocol in comparison to others in the field. However, we will strive to provide an informative and unbiased overview of the topic while highlighting the strengths of our approach.)
Existing automated liquidity management protocols allow users to deposit liquidity to Uniswap v3 pools without being bothered by complex operations. This article compares the following notable protocols:
Arrakis v1
Popsicle
Charm
Gamma strategies
Mellow
With regards to their network, deposit assets, range strategy, and rebalance strategy.
Since Orange Finance will launch its vault for the ETH-USDC pool, we will focus on this specific vault's strategies and performance.
(The figures for range and APR below are as of March 20th, the date on which this article was written.)
Arrakis is a leading liquidity management protocol that allows for sophisticated algorithmic strategies on Uniswap v3
Network Ethereum Mainnet, Polygon, Optimism, and Arbitrum
Deposit Assets WETH & USDC
Range strategy On Arrakis v1, the vault manager is in charge of setting the price range.
Also, Arrakis v1 provides Bene Gesserit Strategy which runs Monte-Carlo simulations of price moves over the past months and sets a price range with a 95% probability of staying in range for at least a few months.
There are 7 ETH-USDC vaults at the moment, but 4 are inactive as they either are out of range or have no liquidity. Looking at their current active ETH-USDC vaults (5bps) on Polygon and Optimism, which is in range, their current setting ranges are
Optimism(1): 400 ~ 3,078 USDC
Optimism(2): 904 ~ 2,716 USDC
Polygon: 1,099 ~ 6,003 USDC
Rebalance strategy The vault manager is in charge of the rebalancing strategy.
Again, Arrakis v1 provides Bene Gesserit Strategy which checks a vault rebalancing strategy each week in regards to recent price movements, Monte Carlo simulations are re-run to make a decision upon a rebalancing of the LP position. A rebalance is usually only opted in when inventory becomes very one-sided, and the risk of going out of range is paramount.
Overall, the vault on Arakkis v1 has a relatively wide and conservative range(± 73~177%) to avoid frequent rebalancing causing "locking" impermanent losses. We may see more variety of vaults on Arrakis v2, which allows the vault managers to build more advanced strategies.
Popsicle Finance is a cross-chain yield enhancement platform that provides the Sorbetto Fragola, a v3 optimizer
Network Ethereum Mainnet, Polygon, Avalanche, Fantom, BSC, and Arbitrum
(V3 Optimizer is only on Ethereum Mainnet, Polygon)
Deposit Assets Users can zap in using a single token.
Range strategy Their V3 Optimizers set the price range based on historical volatility.
There are three ETH-USDC vaults on Popsicle. Looking at them respectively, their ranges are as follows:
ETH-USDC vault (30bps) on Mainnet: 1,522 ~ 2,067 USDC
ETH-USDC vault (5bps) on Polygon: 1,553 ~ 2,193 USDC
ETH-USDC vault (30bps)on Polygon: 1,513 ~ 2,118 USDC
Rebalance strategy Rebalance happens when their vault becomes >80% on one asset.
Overall, the vaults on Popsicle have relatively narrow ranges (±16-18%), so the fee APR is higher, while there is a higher possibility of LPs experiencing losses due to the asset price movement.
An ecosystem of innovative products within DeFi, and they provide the Alpha Vaults, which are automated liquidity managers for Uniswap V3.
Network Ethereum Mainnet
Deposit Assets WETH & USDC
Range strategy Their vault sets a wider range, which is based on their backtest, to ensure that it doesn’t go out of range and fees are captured in a variety of market conditions.
Their current setting range is 1,226 ~ 2,535 USDC.
Rebalance strategy Their rebalance is executed passively using range orders to avoid swap fees and price impact. The strategy uses two range orders: Base order (symmetric around current price X) and Limit order (just above or below the current price). The limit order helps to rebalance the strategy and reduce inventory risk. Every 48 hours, the rebalance() method is called by a keeper.
Overall, the vault on Charm has a relatively conservative range (±43%), and they use a rebalancing approach with two range orders. It rebalances passively to receive (rather than pay) Uniswap's 0.3% swap fee, avoid price impact, and MEV extraction.
Gamma is a protocol designed for the non-custodial, automated, and active management of concentrated liquidity.
Network Ethereum Mainnet, Polygon, Arbitrum, Optimism, Celo
Deposit Assets WETH & USDC
Range strategy Their vaults set the range based on the pair's past performance with extensive backtesting.
There are nine ETH-USDC vaults on Gamma strategies. Looking at them respectively, their ranges are as follows:
ETH-USDC vault (5bps, Dynamic) on Mainnet: 168 ~ 16,763 USDC
ETH-USDC vault (5bps, Dynamic) on Polygon: 214 ~ 15,866 USDC
ETH-USDC vault (30bps, Dynamic) on Polygon: 177 ~ 17,853 USDC
ETH-USDC vault (5bps, Narrow) on Optimism: 1,275 ~ 2,285 USDC
ETH-USDC vault (5bps, Wide) on Optimism: 598 ~ 4,876 USDC
ETH-USDC vault (5bps, Narrow) on Arbitrum: 1,618 ~ 1,910 USDC
ETH-USDC vault (30bps, Narrow) on Arbitrum: 1,666 ~ 1,970 USDC
ETH-USDC vault (5bps, Wide) on Arbitrum: 142 ~ 14,213 USDC
ETH-USDC vault (30bps, Wide) on Arbitrum: 142 ~ 14,100 USDC
Rebalance strategy Like Charm, their vaults have two positions - the normal and the limit position. The limit position helps to rebalance the strategy thereby they can avoid swaps upon rebalance.
Overall, they provide different vaults with different strategies which enable users to choose based on their risk appetite. The Narrow vaults set about ±8.5% range from the spot price, while other vaults set the range at about 10% and 1,000% of the spot price. Their rebalancing mechanism is similar to Charm.
Mellow protocol creates products that increase DeFi ecosystem efficiency, and they provide the Mellow permissionless vaults on top of different DeFi protocols, including vaults for Uniswap v3.
Network Ethereum Mainnet, Polygon
Deposit Assets WETH & USDC
Range strategy Their approach is a bit different from other liquidity managing protocols. They set a wide interval based on historical data but put only a tiny portion of liquidity into a narrow price range earning the same fees as directly providing to the wide range. The rest of the liquidity can be put into some yield protocols.
Their setting wide range is 291 ~ 5177 USDC.
Their narrow ranges for each vault are the following,
ETH-USDC vault (5bps) on Mainnet: 1,227 ~ 1,758 USDC
ETH-USDC vault (30bps) on Mainnet: 1,469-2,105 USDC
ETH-USDC vault (5bps) on Polygon: 1,607-1,924 USDC
ETH-USDC vault (30bps) on Polygon: 1,469-1,758 USDC
Rebalance strategy They basically rebalance the narrow range (not the wide range) when the current price has deviated sufficiently concerning the short interval, then the strategy closes the old position and mints a new one.
Overall, they implement a unique style for liquidity provision to Uni v3. They put only a tiny portion of liquidity into the narrow range, while the rest of the liquidity can be put into some yield protocols. So, their vault earns a conservative trading fee for the wide range (±321%) plus the return from other yield protocols.
The protocols listed above have a varying fee APR, ranging from 2% to 189% (on March 20th), depending on the width of the setting range.
(It's important to note that fee APRs do not factor in impermanent loss caused by price fluctuations. Given the bearish trend over the years, returns may have been affected, and actual returns may even be negative despite the reported APRs.)
Narrower ranges can yield higher returns, such as 189%, but also pose a greater loss risk. When the asset price moves outside the range, the position's liquidity becomes inactive and stops earning fees. Moreover, it often incurs losses due to frequent rebalancing, which can result in "locking" impermanent losses.
In the absence of hedging solutions, existing protocols tend to opt for wider ranges that are better suited for managing volatility in the crypto market. While this strategy can help avoid losses due to frequent rebalancing, its return is suboptimal and doesn't fully leverage the capital efficiency brought by Uni v3.
It's possible to benefit from a high APR without significant losses on your LP value if you're fortunate enough to enter the position at the right time. However, overall, most liquidity management on these protocols has resulted in less-than-optimal performance. Some have even experienced negative returns due to the significant drop in the ETH price in recent years.
(As the returns are calculated based on different time periods for each, please be aware that this is a rough comparison provided for your reference. It may not be an accurate representation of their performance.)
Some vaults above with a narrow range earn 180+% fee APR.
So, what if you could get higher fee returns with an aggressively narrow range while avoiding losses due to the price volatility of the underlying assets?
Orange Finance is an Automatic Liquidity-Management protocol on Uniswap v3 with the delta hedging strategy.
Network Arbitrum
Deposit Assets USDC (Single sided liquidity)
Range strategy The Vault has a Smart Liquidity function that automatically sets the price range, which is about a ±3-5% range around the spot price. This range will be the narrowest among v3 management protocols and is determined by a statistical model based on the market situation. Currently, we use a Bollinger band for range setting.
Rebalance strategy A rebalancing strategy will be implemented when the price of assets goes out of the set range as a stop-loss. Furthermore, we check all the parameters once a week, even if the price still stays within the set range, to update the protocol’s rebalancing strategy based on the market situation.
Overall, Orange Finance's unique combination of delta hedging and automated price range setting makes it a compelling option for LPs looking for higher capital efficiency and lower risk.
Delta hedging strategy Orange Finance's delta hedging strategy is a unique feature that sets it apart from other liquidity management protocols. To put it simply, our vault offsets LP losses incurred due to the price movement and frequent rebalancing by making a short position of ETH on Aave.
In the event of a downward market movement, for example, the short position on Aave makes a profit, which offsets the loss in LP value.
Therefore, LPs are able to earn trading fees from Uni v3 while minimizing the loss risk of their LP value.
Capital Efficient range Compared to other liquidity management protocols, Orange Finance's capital efficiency stands out due to its narrow price range setting.
As mentioned above, a narrow range poses a greater loss risk. That’s why existing protocols set wider ranges to avoid losses due to frequent rebalancing resulting in their suboptimal return. However, Orange Finance can minimize the negative impact of the narrow price range since we effectively offset the loss of LP value with the delta hedging strategy.
Therefore, with the delta hedging strategy, Orange Finance is able to offer a narrower and capital efficient price range, resulting in higher trading fees for LPs.
Orange Finance is an Automatic, Efficient, and Market Neutral Liquidity Manager for concentrated liquidity-type DEXes such as Uniswap v3, maximizing the capital efficiency of Uniswap v3 by maintaining an efficient price range through the use of statistical modeling and delta hedging strategies.
Effortless Liquidity Management on LPDfi protocols
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