Tool Introduction | Uniswap v3 Simulator: Maximize Your Liquidity Efficiency, Are You Ready?

News of Uniswap's launch of v3 on May 5th in the United States has long been anticipated. The biggest change in Uniswap v3 is that it transitions from the traditional AMM model to a "Concentrated Liquidity" model resembling an order book.

Unlike Uniswap v2, the major difference in v3 is that liquidity providers can potentially earn significantly higher trading fees through setting price ranges. The official claim is that v3 can achieve up to 4,000 times the capital efficiency.

Setting price ranges is crucial for maximizing fee revenue. If the range is too wide, trading fees may be substantially reduced compared to v2.

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This price range setting looks similar to "grid trading," but in the process of swapping two tokens, Uniswap v3 earns trading fees while grid trading pays fees to centralized exchanges, with income from price arbitrage.

How will Uniswap v3's liquidity revenue model operate in practice? Uniswap founder Hayden Adams shared a Uniswap v3 simulator, giving us a rough idea of its operations and expected returns:

Uniswap v3 Simulator Features

Custom Liquidity Price Range Strategy

On the webpage, you can select the trading pair to simulate the liquidity pool for v3. In the example, the trading pair chosen is WETH/USDC. An investment of $1,000 is made, with $500 in WETH and $500 in USDC initially invested. At the time, the exchange rate for WETH to USDC is $3290.

You can set two pricing ranges for comparison.

In the example, Strategy One has a narrower price range, while Strategy Two has a wider range. Strategy One sets the upper and lower limits at 2515~4225, indicating that liquidity is only provided within this range. If WETH/USDC goes above 4225, all your liquidity will convert to USDC; if it falls below 2515, it will all convert to WETH. The same logic applies to Strategy Two.

You can then compare Strategy One, Strategy Two of v3 with the full-range price interval of v2.

The green line represents the value change of WETH/USDC liquidity in Uniswap v2. As the liquidity pool must maintain equal values of both tokens, the quantity of tokens adjusts with price fluctuations.

Due to the liquidity provided by v2, with a default price range from infinitely small to infinitely large, the asset value changes more favorably as the WETH/USDC price moves. Since the liquidity of WETH/USDC does not convert entirely to one of the tokens, it can better maintain the total asset value across all price ranges compared to v3 Strategies One and Two.

Looking at v3's strategies, due to the restricted price range, liquidity will convert predominantly to one token near the upper and lower limits. Strategies One and Two both show that as the price of WETH/USDC approaches the upper limit range, it mostly converts to USDC, resulting in only a slight increase in liquidity value as WETH continues to rise. The logic is the same when nearing the lower limit range.

In the example below, in the scenario where ETH price reaches $5,000, the $1,000 invested in v2 would grow to $1232.88, while the strategy represented by the blue line would only have a value of $1064.

What are the benefits of v3? From the table on the right, it can be seen that as liquidity providers in v3 concentrate assets within the price range for trading, the same capital input in v3 can occupy a higher liquidity proportion within the price range, thus generating more trading fees.

Therefore, in the simulator, we can see that the purple strategy, with a narrower price range, is 8.22 times more fee-efficient compared to v2, while the wider blue strategy is 3.85 times more fee-efficient than v2.

Comparison of Fee Revenues between v3 and v2

Another simulation result estimates the fee income for v2 and v3. You can input "Liquidity Input Days", "Final Coin Price", "v2 Fee Rate of Return at Investment Time", "Volatility Days within Strategy One Price Range", and "Volatility Days within Strategy Two Price Range." Note on 5/14: Volatility days within strategy price range have been changed to a percentage.

During the test, the fee annualized return of v2 ETH/USDC at the time is cited as 61%, with liquidity input days set at one year and the final ETH price reaching $4,000. Price movements were observed within the price range of both Strategy One and Strategy Two for 50 days.

The results show that under the price range restrictions of v3, the income including fees is significantly higher compared to v2. However, it must be emphasized that these are only simulated data, and actual income may vary depending on market conditions.

Comparison of returns under each strategy:

This simulation website offers other interesting data to explore. Readers interested in providing liquidity in Uniswap v3 can try it out.