Measuring the Profitability of Strategies
The concentrated liquidity feature of Uniswap enables LPs to customize their active strategies as market makers on DEXs. Due to the current high fees, constructing strategies for liquidity provision has been primarily passive, on-chain, and with wide price ranges.
Current strategies are mostly passive due to high fees. However, in order to adapt to and profit from the Arbitrium implementation, an active liquidity strategy is essential. Teahouse built a reinforced model from historical data collected, and backtested it using simulation results. Instead of hypothesis testing the utility function, we prefer to observe empirical price movements and construct a dynamic price range strategy to optimize yield for the lower gas fee environment of Ethereum Layer 2.
First, we deconstruct the transactions of Uniswap and calculate the Gaussian processes of spot prices to predict the price range with stochastic standard variation. The preliminary result of our flagship strategy (Wanhua) shows that the preset price range covers 90% of the spot price while repositioning the price range 12% of the time. However, to reduce the frequency of repositioning, we have to adjust the width of our price range to produce the best overall condition for our strategy.