Comparing Predy V3 to Uniswap V3: How much does it improve LP Capital Efficiency?
This blog post assumes that the reader is familiar with the concept of liquidity provider (LP) positions on Uniswap, and understands that they behave similarly to a covered call. If this information is not clear, we recommend reading the article ‘Uniswap V3 LP Tokens as Perpetual Put and Call Options’ ‘How to Create Perpetual Options in Uniswap v3’ by Guillaume Lambert for further understanding. And information on this blog including Uniswap, Predy financewas accessed on January 15, 2023 at 4:14 (UTC).
Methodology for Comparing Capital Efficiency: Uniswap V3 vs Predy V3 LP Positions
In order to compare the capital efficiency of Predy V3 and Uniswap V3, we will take the following steps:
- We will examine the short put position on Predy V3, which is a leveraged LP position on Uniswap V3. We will look at the amount of Gamma that can be obtained with one contract of the short put and the amount of USDC required as collateral.
- We will calculate the amount of USDC required to obtain the same amount of Gamma on Uniswap V3.
- We will compare the results from steps 1 and 2 and calculate the leverage ratio.
Supplement: A Quick Comparison Using External Sites for Those Who Want to Compare
When you access Predy v3and select the short put option, you will notice a range displayed below the strike price.
This range is similar to the range of an LP position on Uniswap. Therefore, if you want to easily compare the short put position on Predy V3 to an LP position on Uniswap V3, you can simply check the equivalent range on Uniswap at the same time. For example, The above shows that you can take Perpetual Short Put positon with $207.01 margin for Daily interest $4.24.
As we already have the Upper tick and Lower tick data for Uniswap.
let’s access Uniswap.fish with this data. This site is very informative and it will be a great reference.
With this site, we can see that You can get $2.02 per day with $1000 Deposit.
Of course, there are a few things to keep in mind:
- Predy V3has a minimum margin, and you will usually accumulate at least 1.5–2 times more margin.
- Predy V3 is an Arbitrium, while Uniswap.fish is Ethereum information, so there are differences.
- Predy V3 has a Liquidation, but Uniswap LP has no Liquidation.
Even taking these considerations into account, it seems that using Predy V3compared to Uniswap,
- The required margin is less than 1/3,
- And the obtained interest rate is about x2 higher.
In the next chapter, let’s take a more mathematical approach to compare it.
“An in-depth look at the short put position on Predy V3with Gamma: Comparison to leveraged LP position on Uniswap V3”
Comparison of capital efficiency can be rephrased as how much Gamma can be obtained with the same amount of capital. But what is Gamma? We strongly recommend reading the following paper, “The Replicating Portfolio of a Constant Product Market with Bounded Liquidity,” for more information. However, let’s simply think of it as a number. Of course, it is better to have less capital when dealing with the same amount of Gamma. First, let’s check how much USDC is needed for a certain amount of Gamma on Predy V3.
Click on Gamma. Gamma will be displayed like this such as -0.003071. Gamma of -0.003071 can be obtained for $207.01.
Now, what about Uniswap V3? How much would it cost to obtain the same amount of Gamma? On Uniswap, Gamma is finally expressed by the following formula.
Therefore, let’s try to find the final required V by substituting the Gamma.
Calculations can be done this way.
If you want to get the same amount of Gamma on Uniswap, you will need $1511.19. Compared to $207, it appears that there is about 7 times more leverage. Of course, with more leverage comes more risk. However, having high capital efficiency is not necessarily a negative thing. If the risk is high, then you can just hold more margin. Yes, it is just an increase in possibility, it’s up to each individual user to decide.
Understanding the Leverage Mechanism on Predy V3
Let’s briefly explain how leverage is achieved in practice on Predy V3. Similar to Aave’s Lending pool, Predy V3 has token pair pools (in this case, USDC and ETH) and Uniswap’s LPToken pools that interact with each other. To put it simply, users are in a state where they are borrowing ETH with USDC as collateral to do LP on Uniswap. We will explain this in more detail in the next blog post.
Then, you are ready to start trading on Predy V3!
If you want to read the Predy V3 documentation, you can find it here: https://predy.gitbook.io/predy3/
Clark, Joseph, The Replicating Portfolio of a Constant Product Market with Bounded Liquidity (August 3, 2021). Available at SSRN: https://ssrn.com/abstract=3898384 or http://dx.doi.org/10.2139/ssrn.3898384