Liquidity Incentive Models
Project parties can set up pairs and liquidity pools based on Uniswap V3 to attract liquidity more efficiently by offering rewards in a limited range and different rewards in different price ranges.
iZUMi Finance provides a wide range of liquidity options to meet the needs of project parties.
izumi LiquidBox is able to distribute liquidity mining incentive tokens in certain price ranges, e.g., [0.95,1.05], to keep the price stable for stablecoin or pegged-assets.
Each block in the (0.95p,1.05p) price range earns 10 tokens from the stablecoin and pegged-asset issuer. izumi evaluates the total effective liquidity in the (0.95p,1.05p) price range and assigns incentive linearly according to the proportion held by each LP. The incentives attract liquidity to this price range, that achieves minimum slippage.
Note: If the LP provides liquidity in a price range that is over-covering (0.95p,1.05p), only the liquidity within (0.95p,1.05p) is calculated as the weight of the incentive allocation; if the NFT price range offered by the LP is inside (0.95p,1.05p), such as (0.98p,1.02p), weight penalty factor is applied.
Analysis: When compared to the xy=k model, the 0.95-1.05 interval is over 50 times more capital efficient, requiring only one-fifth of the TVL and incentives for the same slippage.
iZUMi LiquidBox allows liquidity mining incentive token in current price range to compensate for the impermanent loss caused by price change within corresponding time interval.
Similar to the traditional xy=k model, the LP also puts half value of the USDC and half value of the project tokens into the iZUMi LiquidBox to start liquidity mining with one click.
However, in order to avoid the "Pool 2 dilemma" caused by the traditional xy=k model (i.e. LP puts all USDCs as potential buy orders and project tokens as potential sell orders into the liquidity pool of the trading pair, causing LPs to passively sell their project tokens and suffer from impermanent losses when the price goes up. It also increases passive selling pressure on the project side, preventing price increase and creating a "lose-lose" situation.
iZUMi LiquidBox innovated the "one-sided non-impermanent loss" model based on Uniswap V3, which puts the LP's USDC into the (Pa,Pc), just below the current price Pc, and puts the LP’s project tokens into the staking mining instead of into the trading pool (i.e. above Pc as potential sellers), thus creating a model of "stronger buying than selling", which is more conducive to price increase.
For example, if the current price of XYZ token is 3 USDC, LP will deposit 1k XYZ and 3k USDC into the izumi platform in one click to mine and receive a 90% APR on the total principal (similar to the Sushiswap xy=k model). iZUMi manages this by placing 3000 USDC in the Uniswap V3 (0,3) price range to provide potential buying orders when the price declines. The 1k XYZ is placed in the staking module to lock in liquidity, but not in Uniswap V3, so it won't be sold passively when the price rises, resulting in no impermanent loss or passive selling pressure on the project side.
Analysis: When the price goes up, there is no impermanent loss, and when the price goes down, the percentage of impermanent loss for LP (Pa=0) is the same as xy=k. The overall distributed incentives for the project are the same as in the xy=k model. In the up cycle, passive sell liquidity is low, whereas in the down cycle, buying support is consistent (if Pa is greater than 0 then the buying power is also enhanced).
In iZUMi’s model 3 “Dynamic Range”, users participate in liquidity mining by setting the liquidity in the (0.25Pc, 4Pc) value range of the current price (Pc). The width of the price range can also be set by the project team, for example to (0.5Pc, 2Pc), which will also provide more concentrated liquidity. After the user provides liquidity to the pair at the set price range through the iZUMi platform, the iZUMi smart contract will automatically stake Uniswap V3 LP NFT into the liquidity mining program and the liquidity provider will automatically participate in the mining and start receiving the liquidity mining rewards provided by iZUMi and the corresponding project.
In addition to this, LPs will also receive trading fee revenue from Uniswap V3 because the value range set by the liquidity provider includes the current token price. The combination of these two revenues will significantly increase the liquidity provider’s expected returns. The benefits of a liquidity provider’s participation in liquidity mining will be calculated as a percentage of the total liquidity of the program in terms of the thickness of the liquidity it provides (v_liquidity), as follows:
Based on the above equation, we can conclude that compared to traditional liquidity mining activities in the full range, based on the iZUMi model 3 “Dynamic Range”, if the price range is set to (0.5Pc, 2Pc), it will provide approximately three times more efficient capital utilization. And based on the “Dynamic Range” Model, users do not need to adjust their positions frequently. Even if there is an extreme situation where the price of the coin has a large unilateral movement and breaks the value range (0.25Pc, 4Pc) corresponding to the price of the token when participating in liquidity mining, the Uniswap V3 LP NFT that the user has staked will continue to generate liquidity mining revenue for the user as long as the liquidity mining is not terminated. Of course, liquidity providers can choose to redeem and re-provide liquidity based on the latest price, which ensures that they will continue to receive Uniswap V3 trading fees in addition to the liquidity mining revenue.
Last modified 9mo ago