Market Making on Uniswap: An Analytical Approach - Part III

@Sakura please summarize this article, thanks uwu.

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Reading https://insights.glassnode.com/market-making-on-uniswap-an-analytical-approach-part-iii/

TLDR :mag:

This report provides an in-depth analysis of the different strategies employed by Uniswap’s liquidity providers, including both organic market makers and bot-driven “Just-In-Time” (JIT) liquidity providers.

Key Points :key:

  • Uniswap’s concentrated liquidity feature has increased competition among liquidity providers, who can now optimize their positions based on anticipated price movements.
  • Around 60% of new liquidity positions are opened within the current price range, while 40% are placed outside the range in anticipation of future price changes.
  • JIT bots monitor the Ethereum mempool and provide liquidity just before profitable trades, extracting a portion of the fees from organic market makers.
  • JIT bots account for a relatively small percentage of the total fees generated in Uniswap pools, with a larger impact on trading volume than number of swaps.
  • Organic market makers tend to provide more broadly distributed liquidity, while JIT bots focus on highly concentrated positions in specific price ticks.

In-depth Summary :memo:

The report begins by providing an overview of Uniswap’s concentrated liquidity feature, which allows market makers to allocate their liquidity within specific price ranges. It then delves into the different strategies employed by liquidity providers, classifying them into two main groups: organic market makers and bot-driven “Just-In-Time” (JIT) liquidity providers.

The analysis reveals that around 60% of new liquidity positions are opened within the current price range, where most trading activity occurs. The remaining 40% of positions are placed outside the current range, indicating that market makers are anticipating future price movements and positioning their liquidity accordingly.

The report then examines the impact of JIT bots, which monitor the Ethereum mempool and provide liquidity just before profitable trades are executed. While these bots do not directly harm traders, they do extract a portion of the fees that would otherwise go to organic market makers. However, the report finds that the overall impact of JIT bots is relatively small, accounting for less than 7% of the total fees in most Uniswap pools.

When comparing the strategies of organic market makers and JIT bots, the report notes that organic providers tend to have more broadly distributed liquidity positions, while JIT bots focus on highly concentrated positions in specific price ticks. This allows the bots to quickly capitalize on predicted price movements and extract the associated fees.

ELI5 :hugs:

This report looks at the different ways people provide liquidity (money) to the Uniswap decentralized exchange. Some people, called “organic market makers,” put their money in a range around the current price, hoping to earn fees from trades. Others, called “bots,” try to predict when prices will change and quickly put their money in just before that happens, so they can take a cut of the fees.

The report finds that the bots don’t actually take that much money from the organic market makers, even though they use some fancy tricks. The organic market makers still make most of the money, and the bots’ activities actually help improve the overall trading experience on Uniswap.

Writer’s Main Point :bulb:

The main point of this report is to provide a comprehensive analysis of the different liquidity provider strategies on Uniswap, including the impact of bot-driven “Just-In-Time” liquidity providers. The findings suggest that while JIT bots do extract a portion of the fees, their overall impact is relatively small, and they may even have a net positive effect by improving liquidity and the trading experience.

Relevant Links :link: