Bibliographic Information: Urusov, A., Berezovskiy, R., & Yanovich, Y. (2024). Backtesting Framework for Concentrated Liquidity Market Makers on Uniswap V3 Decentralized Exchange. Blockchain: Research and Applications. arXiv:2410.09983v1 [q-fin.MF]
Research Objective: This paper aims to develop a backtesting model that simulates the dynamics of a CLMM pool, specifically focusing on Uniswap V3, to accurately estimate the potential rewards for liquidity providers.
Methodology: The researchers designed a backtesting framework based on a multi-dimensional NumPy (CuPy) array structure. This structure represents the pool states based on the current pool price and the liquidity distribution configuration of a specific liquidity provider. The framework incorporates a τ-reset strategy for dynamic liquidity placement and calculates rewards based on simulated trading volumes and fee structures. The researchers tested the framework using real historical price data from Binance and actual Uniswap V3 pool data.
Key Findings: The backtester demonstrated its sensitivity to pool configuration parameters and highlighted the significant impact of price change frequency on the accuracy of reward estimation. Using actual pool price data resulted in more accurate reward predictions compared to using CEX quotes. The study found that the developed backtester could effectively simulate trading strategies and liquidity provision scenarios, providing a quantitative assessment of potential returns for liquidity providers.
Main Conclusions: The proposed backtesting framework provides a valuable tool for evaluating the profitability of different liquidity provision strategies on Uniswap V3. The researchers emphasize the importance of using accurate price data and considering transaction frequency for reliable reward estimations.
Significance: This research contributes to the field of decentralized finance by providing a practical tool for liquidity providers to optimize their strategies and manage risks associated with CLMMs on Uniswap V3.
Limitations and Future Research: The study primarily focused on the USDC/ETH pair on Uniswap V3. Future research could explore the framework's applicability to other token pairs and decentralized exchange platforms. Additionally, incorporating more sophisticated price prediction models and considering factors like gas fees and impermanent loss in dynamic market conditions could enhance the framework's accuracy and practicality.
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by Andrey Uruso... at arxiv.org 10-15-2024
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