Active Liquidity Management

ABSTRACTUNISWAP V3 is a noncustodial automated market maker implemented for the Ethereum Virtual Machine. In comparison to earlier versions of the protocol, UNISWAP V3 provides increased capital efficiency and fine-tuned control to liquidity providers, improves the accuracy and convenience of the price oracle, and has a more flexible fee structure. In this paper, we present UNISWAP V3, a novel AMM that gives liquidity providers more control over the price ranges in which their capital is used, with limited effect on liquidity fragmentation and gas inefficiency. This design does not depend on any shared assumption about the price behavior of the tokens. UNISWAP V3 is based on the same constant product reserves curve as earlier versions but offers several significant new features: [1]INTRODUCTIONAutomated market makers (AMMs) are agents that pool liquidity and make it available to traders according to an algorithm [2]. Constant function market makers (CFMMs), a broad class of AMMs of which UNISWAP is a member, have seen widespread use in the context of decentralized finance, where they are typically implemented as smart contracts that trade tokens on a permissionless blockchain [3].CFMMs as they are implemented today are often capital inefficient. In the constant product market maker formula used by UNISWAP v1 and v2, only a fraction of the assets in the pool are available at a given price. This is inefficient, particularly when assets are expected to trade close to a particular price at all times.Prior attempts to address this capital efficiency issue, such as Curve [4] and YieldSpace have involved building pools that use different functions to describe the relation between reserves. This requires all liquidity providers in a given pool to adhere to a single formula, and could result in liquidity fragmentation if liquidity providers want to provide liquidity within different price ranges.1