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Challenge #5: LP Profitability Analysis

Thousands of markets exist across Uniswap v2 and v3, enabled by liquidity providers (LPs) who park assets in pools in exchange for fees. But how much do LPs stand to gain from this activity? What is the opportunity cost of LPing ETH vs. just holding your ETH?

In the previous challenge, we analyzed the opportunity cost for LPs to understand the cost of holding a position in a liquidity pool versus rebalancing. This challenge aims to tackle the question of opportunity cost versus just holding the base asset. By analyzing the profitability of major v2 and v3 pools across the Uniswap landscape, we aim to shed light on LP behavior and dynamics and uncover the true costs of holding versus LPing.

Challenge Objectives

1. Profitability Analysis Across Time Frames:
   • Analyze the profitability of being an LP in major Uniswap v2 and v3 pools across different time frames (e.g., trailing 30-day, 60-day, and 180-day periods).
   • Calculate net gains or losses for LPs during these periods, factoring in fee earnings, impermanent loss, and changes in asset prices.
   • Compare these results to the alternative strategy of simply holding the base asset without providing liquidity.
2. Opportunity Cost Quantification:
   • Develop a methodology to quantify the opportunity cost of LPing versus holding the base asset.
   • Include scenarios where high volatility in the base asset affects LP profitability, demonstrating the impact of price changes on LP gains or losses.
3. Cross-Version Comparison:
   • Compare LP profitability between Uniswap v2’s constant product pools and v3’s concentrated liquidity pools.
   • Identify key differences in profitability drivers, such as fee structures, liquidity ranges, and volatility exposure.
4. Behavioral Insights and LP Dynamics:
   • Analyze LP behavior in response to changes in market conditions, such as increased volatility or shifts in trading volume.
   • Investigate how LPs adjust their liquidity ranges in v3 to optimize profitability and mitigate losses.
5. Visualizing Profitability:
   • Create visualizations that clearly depict LP profitability over time across different pools, highlighting the effects of volatility, trading volume, and pool mechanics.
   • Develop interactive tools or dashboards that allow users to explore LP profitability under various scenarios.

Ultimately, these are all just options for you. Even a single chart with thoughtful analysis can be insightful. Your may feel free to explore one or a few of these objectives.

Expected Outcomes & Deliverables

• A comprehensive analysis of LP profitability in major Uniswap v2 and v3 pools, broken down by 30-day, 60-day, and 180-day periods.
• A quantified opportunity cost of LPing versus holding the base asset, with clear methodologies and assumptions outlined.
• Comparisons between v2 and v3 pools, highlighting differences in profitability due to distinct pool mechanics.
• Visualizations that effectively communicate LP profitability trends and insights.
• Recommendations for LPs on optimizing their strategies based on historical profitability data.