[SIPS-007] - VOLUME-WETH-USDT-005 Uniswap v3 Cellar
Status: Proposed
Author(s): Volume
Type: Text
Discussions-to: [SIPS-007] - VOLUME-WETH-USDT-005 Uniswap V3 Cellar
Created: 01/19/2022
Simple Summary
The Volume Team would like to introduce Sommelier Cellar proposals for the Sommelier community that leverage the power and capabilities of Sommelier Cellars Uniswap v3 rebalance functionality to manage Uniswap v3 range orders submitted initially by Volume, but potentially any other active management strategy teams.
This cellar will consist of liquidity management of the 0.05% fee tier WETH-USDT pool. This Cellar only collects fees to cover the gas costs for active rebalancing. The Cellar utilizes a wide range position to:
- Minimize impermanent loss
- Minimize the number of rebalance calls
The cellar’s objective is to launch the first VOLUME Cellars on Sommelier where VOLUME Data science strategies actively manage positions on Uniswap v3 pools that have high TVL but low fee revenue.
Sommelier Foundation, if you are interested in the community taking this proposal and conversation to an on-chain vote, please send a signal with 10 SOMM tokens at the Sommelier Address below:
somm1m767hcal3c42czfwr0tad0pvzvqdka4n9cd6cu
We will use this to deposit the 10 SOMM required to start the voting period for this proposal.
Abstract
The Volume team proposes an initial Sommelier Cellar for Unisap v3 that leverages the Sommelier rebalancing functionality to manage range order positions on Uniswap v3. The Volume team presents its first cellar for the WETH-USDT 0.05% Uniswap v3 pool. This Cellar selects an optimally wide band to limit rebalance costs on the cellar. It also assumes that fee revenue in this pool will be low so the cellar only charges fees to cover the gas costs for actively rebalancing a few times a year. This Cellar aims to be a perpetually running pool manager with low overhead and low cost for Uniswap v3 liquidity providers.
The LP token for this initial cellar will be called VOLUME-WETH-USDT-005 and each deposit will yield an LP token to Liquidity Providers. The Cellar contract itself will be owned by the Sommelier Gravity Bridge. The Volume team will retain some administrator controls to manually rebalance, pause or stop the Cellar contract in the event that the Gravity Bridge does not complete these commands in a timely manner. The Cellar also limits deposits to $10,000 per transaction to limit risks as this is a first version of this strategy. The Volume Cellar contract was Audited by Quantstamp with the final audit available here:
Motivation
The Volume team motivation for the launch of this pool is the goal to showcase the capabilities of the Sommelier blockchain to manage Uniswap v3 positions and to allow Liquidity Providers who seek to hold ETH and USDT forever without a desire to manage range positions or impermanent loss adjustments. This Cellar should allow ETH and USDT Liquidity Providers new peace of mind that their positions may be maintained indefinitely by the Sommelier blockchain.
Why launch on the Uniswap WETH-USDT 0.05% pool?
Uniswap v3 LPs make money from fees collected on swap transactions. A swap with amounts amt0 and amt1 at a tick value tick gives a liquidity provider (LP) revenue in proportion to the magnitude of liquidity provided at tick. Suppose that token 0 is swapped for token 1. This means the LPs provide amt1, making it a positive value in the swap transaction, and the fees are collected on the negative quantity, amt0. In this case,
fee_revenue = abs(pool_fee_rate * amt0 * lp_liq_at_tick / pool_liq_at_tick)
where pool_liq_at_tick is the liquidity from all of the LPs in the pool and lp_liq_at_tick is the liquidity of the single LP. Notice that this implies liquidity providers are in competition with each other as higher pool liquidity means lower transaction fees.
Thus, the key things LPs should look for in a pool are low TVL (low competition) and high swap volume. The Volume data science team looked at fee collections across all of the top Uniswap v3 pools over the past few months and found that the most consistently performing pools were USDC-WETH 0.05%, WETH-USDT 0.05%, and DAI-WETH 0.05%. These pools tend to get about twice the fees per TVL as the 4th and 5th best pools and more than 10 times the fees per value locked (FPVL) of the 10th best (on average).
| TVL ($) | 100 day fees ($) | Pool | FPVL (100 day) |
|---|---|---|---|
| 35.5M | 8.6M | WETH-USDT 0.05% | 0.242 |
| 28.8M | 7.5M | DAI-WETH 0.05% | 0.260 |
| 249.1M | 9.3M | USDC-WETH 0.05% | 0.037 |
Note: The values used to generate the above table and plots came from https://info.uniswap.org/ and Flipside’s Uniswap v3 Position Collected Fees table on Jan 16, 2022.
Specification ‌Overview
The specification for this Cellar consists of the following:
- The Volume Range Order Analysis
- Range Order Processing for Rebalance transactions
- Sommelier and the Sommelier Gravity Bridge
- Volume Cellar Smart Contracts
- Volume Cellar Contract Audit
Technical Specification
-
The Volume Range Order Analysis:
Volume runs Uniswapv3 range order analysis on its servers and then sends updated range orders to Sommelier’s Steward application for rebalancing on the Uniswap v3 protocol. Volume targets pools with lower competition for fee revenue for Liquidity Providers and higher transaction volumes.
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Range Order Processing for Rebalance transactions:
Volume range orders interact with the Sommelier Blockchain validator network to provide range orders to Sommelier’s Steward running as an application on the validator nodes. Steward is the Sommelier Cellar Rebalancer software. Steward may run in single signer mode or as a voter in the Cosmos sommelier protocol. It integrates the full functionality of gorc for operating as an orchestator and relayer of gravity bridge messages between Ethereum and Cosmos chains. To provide data to Steward, an encrypted and authenticated gRPC connection must be established. The client certificate authority used by the initial Data Provider is included in tls/. This is the only client root of trust accepted by default by Steward right now as we are only accepting client certs from one Data Provider, VolumeFi. You can learn more about the open source Steward here: https://github.com/PeggyJV/steward.
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Sommelier and the Sommelier Gravity Bridge:
The Sommelier Blockchain is a Cosmos SDK chain with Tendermint Consensus blockhain. The Gravity Bridge is a Cosmos SDK module that handles messages from the Sommelier chain as they are encoded and sent to the Ethereum Blockchain. Gravity Bridge allows also for creation of Sommelier tokens that may be mirrored on Ethereum and vice versa. The Gravity Bridge will also receive ownership of the Volume Cellar contract. More awareness of the Gravity Bridge is available here: https://github.com/PeggyJV/gravity-bridge
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Sommelier Cellar Contract Proposal:
The Sommelier network requires a specific proposal be submitted for onchain governance vote. The proposal is a formattted JSON file that is included with 10SOMM in a vote transaction on the Sommelier blockchain. A sample gist of the proposal is available here: https://gist.github.com/taariq/8f492088f7fdcbe7680a6b21c327ca9a
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Volume Cellar Smart Contracts:
The Volume team created the initial Uniswap v3 Cellar design available here: https://github.com/VolumeFi/cellars. The Cellar allows for the initialization of an ethereum contract that interacts with the Uniswap v3 router, factory, and periphery contracts to create and manage positions on any Uniswap v3 pool. A final audit provided by Quantstamp is available here: https://github.com/VolumeFi/cellars/tree/main/audits. A final deployed version of the contract will be shared.
Rationale
The Promise of the Sommelier Blockchain comes alive with the release of the VOLUME Uniswap v3 Cellar for WETH-USDT-005 deployed to mainnet. We hope this launch will prove an example for other teams to launch their own Cellars and inspire a new ecosystem of decentralized finance features powered by the Cosmos ecosystem.