Author: vim
As a brand-new disruptive DeFi platform, Vimverse fully taps into the huge potential of protocol-controlled liquidity (POL) and Uniswap V3 mechanisms, aiming to explore more possibilities in the fields of liquidity management and yield optimization for projects such as DeFi, NFT and GameFi, and redefine the boundaries of decentralized finance.
First let’s review POL.
Liquidity mining is a common model in the DeFi field. Based on the short-term nature of liquidity in the market, this method often leads to liquidity fragmentation. However, DeFi protocols can reduce fragmentation and improve system stability by purchasing liquidity from the market. The introduction of a protocol-controlled liquidity mechanism transforms temporary market liquidity into persistent protocol-controlled liquidity, opening up a new way of liquidity management.
Olympus DAO achieved this innovation through a bond mechanism. Through this mechanism, users can exchange their LP tokens for the protocol's native token OHM at a discount. Instead of rewarding temporary liquidity by minting new tokens, Olympus DAO incentivizes users to sell their LP tokens to the protocol in exchange for discounted OHM. The OHM tokens obtained are released linearly, and users can redeem all OHM at the maturity of each bond, avoiding excessive price pressure from selling all discounted tokens to the market at once. Olympus DAO had more than 99.7% of OHM-DAI and OHM-FRAX liquidity at its peak, proving the success of this mechanism. As a liquidity provider, Olympus DAO earns millions in trading fees every day on decentralized exchanges, and sufficient liquidity also greatly reduces trading slippage.
Vimverse has gone a step further and introduced an innovative mechanism of protocol proactive market making (PMMM) based on Uniswap V3, further improving the capital utilization efficiency of protocol-owned liquidity (POL). Unlike Uniswap V2, where liquidity is evenly distributed throughout the price range, the Uniswap V3 mechanism allows Vimverse to strategically concentrate liquidity within a specific price range, enabling it to manage its liquidity more effectively. Vimverse not only draws on Olympus Pro’s mechanism for controlling liquidity through the protocol, but also utilizes the Uniswap V3 mechanism for active market making management, bringing higher value to itself and ecosystem participants.
Let’s explore the advantages of Uniswap V3 further.
One of the advantages of Vimverse is its PMMM mechanism based on Uniswap V3. The most important innovation of Uniswap V3 is the introduction of centralized liquidity. Unlike its predecessor, where liquidity was evenly distributed across all price ranges, Uniswap V3 allows liquidity providers to specify price ranges for their liquidity. This means that liquidity providers can concentrate funds in a specific price range, thereby maximizing transaction fees.
Uniswap V3 provides liquidity providers with greater control, allowing them to adjust positions based on their personal risk and return preferences. However, it should be noted that while the centralized liquidity of Uniswap V3 provides greater capital efficiency, it also brings new challenges to liquidity providers. The work of managing liquidity positions becomes more complicated because it requires actively setting and adjusting price ranges.
This can be challenging for market makers or inexperienced liquidity providers who do not have the expertise or time to do so. In volatile market conditions, liquidity may be outside the current price range, liquidity providers may not receive transaction fees, and if not managed properly, it may lead to impermanent loss.
Vimverse is unique in its innovation. Not only does it support protocol-controlled liquidity like OlympusDAO, it also actively manages liquidity through a protocol-active market-making (PMMM) mechanism. By strategically adding liquidity based on the optimal price range, Vimverse provides advantages that OlympusDAO cannot achieve. This not only reduces the risk of ordinary liquidity providers, but also improves the capital efficiency of the protocol and token price stability, maximizing the benefits of liquidity providers.
Next, we will explain in detail the advantages of PMMM from the following four aspects:
1. Capital efficiency
Assuming the current token price VIM=P, we add the amount of ∆VIM and ∆USDT to the Uniswap V3 pool.
Price range [P_a,P_b ]=[P/((1+r) ),P*(1+r)] Then P= √(P_a 〖*P〗_b )∆USDT= ∆L*(√P-√(P_a ))∆VIM= ∆L*(1/√P-1/√(P_b ))
The same number of tokens used in Uniswap V2
∆USDT= ∆L^'*√(P_a*P_b )∆VIM=∆L^'*1/√(P_a*P_b )
Then we can infer that the liquidity depth (defined as capital efficiency) from V3 to V2 is
∆L/(∆L^' )=1/(1-(P_a/P_b )^0.25)
Let’s use actual numbers as an example. Assuming the current price of VIM is 80 (maybe higher), the same number of tokens would be the same if we used Uniswap V3 instead of Uniswap V2.
In the price range of [53, 120], the capital efficiency can reach 5.45X, in the price range of [64, 100], the capital efficiency can reach 9.47X, and in the price range of [76, 84], the capital efficiency can reach 41.49X.
Note: To make the graph easier to view, we use log(liquidity depth) as the y-axis.
Within the price range of [64,100], liquidity depth remains unchanged.
If the protocol has 10,000,000 USDT, using Uniswap V2, the required number of VIMs is
10,000,000/80 = 125,000 ∆L^'=sqrt(K)=sqrt(10,000,000*125,000)=1,118,034
To apply the same liquidity depth to Uniswap V3, we need
USDT = 1,118,034*(sqrt(80)-sqrt(64))= 1,055,728VIM = 1,118,034*(1/sqrt(80) -1/sqrt(100) )=13,197
Therefore, the funds required for the same price range position of V3 = 13,197*80+1,055,728=2,111,456.18
Using the V3 protocol, only 1,055,728 USDT is needed to provide a depth comparable to Uniswap V2. Compared to Uniswap V2, the amount of USDT required is only 10.56%. This enables the project to use the remaining USDT to support the development of the project, such as building a sufficient safety buffer to better protect the price of the token. We will discuss this in subsequent chapters.
What about trading on Binance?
Here is a snapshot of a pair of mid-cap coins as of June 3, 2023.
Source: Coingecko
We can observe that although Binance’s trading volume is 2.4 times that of Uniswap V2, its depth is only 51% of V2 within a price range of +/- 2%. Not to mention, if V3 is used to provide liquidity, the same number of tokens will provide higher depth, enough to support larger orders.
In a paper published by Paradigm in May 2022 titled "Uniswap v3 Liquidity Dominance," this advantage was highlighted, demonstrating that Uniswap v3 consistently exhibits higher market depth across all price ranges.
In addition, the liquidity advantage of Uniswap v3 increases with the impact of expected prices, which means that for large transactions, it becomes increasingly advantageous to trade on Uniswap v3 compared to centralized exchanges. The density of token chip distribution plays a crucial role in this. In the protocol-owned liquidity (POL) model, the vast majority of LPs are controlled by the protocol to provide liquidity. Compared with traditional centralized exchanges, this mechanism essentially helps to enhance the trading experience.
2. Reduce slippage
We continue with the assumptions from the previous section.
First, let’s look at the calculation of slippage in Uniswap V3. For simplicity, assume that liquidity is evenly distributed in the price range [P_a,P_b]. The current price of VIM is P_0, and we need to calculate how much VIM can be obtained with ΔUSDT.
The amount of USDT and VIM in the price range is
USDT= L*(√(P_0 )-√(P_a ))VIM= L*(1/√(P_0 )-1/√(P_b ))
After the transaction, assuming the final price is P_end, the amount is USDT+∆USDT= L*(√(P_end )-√(P_a ))VIM-∆VIM= L*(1/√(P_end )-1/√(P_b ))
Then, the transaction price will be
P_actual=∆USDT/∆VIM=∆USDT/(L*(1/√(P_0 )-L/(∆USDT+L*√(P_0 ))) )
滑点=P_actual/P_0 -1=∆USDT/(L*(1/√(P_0 )-L/(∆USDT+L*√(P_0 )))*P_0 )-1
Since it only has a relationship with L, we can also apply it to Uniswap V2.
Continuing with the previous assumption that the current price of VIM is 80, the amount of USDT available to add liquidity is 10,000,000, and the slippage when trading 10,000 USDT under the v2 and v3 mechanisms is shown in the following table.
It is clear that V3 has achieved significant results in reducing transaction slippage, and this effect is especially obvious in the narrower price range.
Lower slippage is crucial to improving the trading experience. It not only brings more precise and predictable trade execution, but also helps maintain the stability of token prices. This is where the Vimverse protocol has a significant advantage in liquidity solutions.
3. Flexibility in position management
A unique feature of Uniswap V3 is active position management, which allows liquidity providers (LPs) to set a specific price range for the liquidity they provide to concentrate funds in the most ideal price range. In the case of Vimverse, this feature has been fully utilized, allowing the protocol to manage its positions more flexibly and achieve dynamic balance in price fluctuations.
Source: Duneanalytics
This chart shows the rebalancing process of the BTC-USDT trading pair on Uniswap V3, demonstrating how professional liquidity providers dynamically adjust the price range of liquidity based on BTC market trends. In this process, a certain degree of price prediction is required to ensure that future price changes remain within the set range as much as possible, thereby maximizing transaction fee income. Different liquidity providers use different prediction methods, such as dynamic optimization, stochastic modeling, etc.
Therefore, if the platform controls protocol liquidity, it does not necessarily need to be passive. Take the case of Olympus DAO at its peak, which had 99.7% of liquidity. Users chose to sell their LP tokens to the platform and stake the received OHM tokens on the platform. However, these LPs were governed by V2. Assuming the platform is able to utilize V3, it can choose specific price ranges to add liquidity.
The V3 protocol allows liquidity providers (in this case, the Vimverse protocol, as it holds almost all the liquidity) to place liquidity of varying thicknesses in different price ranges, thus strategically managing price fluctuations. For example, in order to maintain price stability, the platform can set a U-shaped price range, adding a large amount of tokens at both ends of the range to prevent it from easily falling out of the range. The platform can also rebalance regularly, gradually adjusting the trading range to strategically guide price movements.
Let's illustrate this with numbers. Assuming that the volatility of VIM price is about 50%, that is, within the range of ±25% or stable between [60, 100] (the actual situation may be different), liquidity can be slightly diluted within this range. By concentrating USDT in the price range of 60 and slightly lower, and VIM in the price range of 100 and slightly higher, it will be difficult for the price to exceed the range of [60, 100] unless there are a large number of buy and sell orders.
Of course, prices don’t necessarily need to be stable forever, and rising prices can provide more adequate funding for the development of a project. We often see many projects plummet in price after the hype subsides, causing people to lose confidence in the project, thus falling into a vicious cycle of price and sentiment. No matter how well designed, a rapid drop in price will undermine user confidence, which can be devastating to a project, especially in its early stages.
Therefore, it is crucial to adopt a position management strategy with a positive impact. Projects can continuously adjust the price range upward after adding initial liquidity. For market makers, this is like a limit order, constantly absorbing funds in the low price range and selling at a high price, and the price range continues to move up. In this way, market makers (here refers to the protocol itself) can get more returns, which is one of the important advantages of the PMMM (Protocol Managed Market Making) strategy.
4. PMMM mechanism benefits
By holding a majority of LP tokens in Vimverse, the protocol can receive all trading fees returned by the exchange, significantly enhancing its profitability. We can discuss how much benefit the PMMM (Protocol Managed Market Making) mechanism can bring to the project. We can use geometric Brownian motion to simulate the price trend of VIM, assuming the initial price is 80, the drift is 0.5, and the volatility is 100%. At the end of each trading day, the protocol rebalances and sets the price range to within ±25% of the day’s closing price, before adding liquidity back through the V3 protocol. The chart below shows the price trend and increasing liquidity range over 180 days.
(Source: Duneanalytics)
We used the Volume/TVL (V/L) ratio of OHM-DAI from July to December 2021 as our volume assumption. During this period, the protocol gradually gained 99% of liquidity, which gives us a better understanding of the potential benefits of the protocol under the POL model.
Assuming that the daily trading volume over these 180 days can reflect the V/L ratio of OHM-DAI in chronological order, we set the USDT used to add liquidity on the first day to 10 million. Due to the narrow price range, we can achieve greater depth with less USDT. We will add additional USDT during lower price fluctuations. At each rebalance, we keep the TVL unchanged and charge a 0.3% transaction fee. The daily trading volume and accumulated transaction fees are shown in the second figure. During this period, the accumulated transaction fees reached 2.55 million USDT. The amount of USDT retrieved during each rebalance is determined by the current market price. During this period, the price gradually increased.
Throughout the process, we generated an additional $3.25 million in USDT (based on continuous rebalancing). The maximum amount of USDT required during this period was 13.5m (when VIM reached its highest price), which means that the actual capital occupation was 13.5 - 3.25 = 10.25m. Based on these data, the annualized rate of return (APR) of transaction fees is (2.55 + 3.25) * (365/180) / 10.25 = 115%, which is a considerable income for the project.
VIM tokens have solid price support. As discussed in the series of articles released by the project, Vimverse will build a complete ecosystem around GameFi and NFT projects to create more application scenarios and value support for tokens. The actual application of tokens will promote a large number of VIM-based transactions (for example, in order to mint GameFi's NFTs in the Vimverse ecosystem, users first need to buy VIM, and then a large amount of VIM will be consumed for minting NFTs).
In the process of participating in the game, since the Vimverse ecosystem uses VIM as a platform token to empower various applications, transactions between VIM and game tokens will occur, and the fees generated will be returned to the platform, further enhancing the value of the project. This forms a virtuous cycle for the project. Therefore, we can make bolder assumptions about the transaction volume. For example, at a V/L ratio of 2x, 5x, and 10x, the income generated can grow exponentially, better supporting the long-term positive development of the project.
in conclusion
Vimverse showcases exciting and innovative applications in the DeFi space. By leveraging the power of Uniswap V3 and Protocol Owned Liquidity and combining the protocol-active market-making (PMMM) mechanism, Vimverse not only reshapes the foundation of liquidity management, but also introduces new possibilities for yield optimization across DeFi, NFT, and GameFi protocols. Its unique protocol-active market-making mechanism improves capital efficiency, reduces slippage, and provides unprecedented flexibility and more lucrative income in position management. By breaking the limitations of traditional liquidity models, Vimverse is expected to play a transformative role in creating a more efficient, stable, and user-friendly DeFi ecosystem.
Vimverse's vision is more than just providing a more efficient liquidity provision platform; it aspires to catalyze a new wave of innovation in the DeFi space. Its approach to liquidity management highlights the potential of DeFi platforms to not only provide superior financial products and services, but also to fundamentally reshape financial markets in a decentralized way.
