On Liquidity Mining for Uniswap v3
This addresses the problem of inefficient liquidity distribution in decentralized finance (DeFi) protocols like Uniswap v3, offering a practical solution for protocol designers and liquidity providers, though it appears incremental as it builds on existing game-theoretic approaches.
The paper tackles the challenge of designing liquidity mining schemes for Uniswap v3, which uses non-fungible liquidity provider tokens, by proposing a flexible scheme that controls local rewards to shape overall liquidity distribution. The result shows that liquidity providers deploy liquidity proportional to reward distributions in some cases, allowing mining reward providers to optimize for goals like low slippage and price stabilization.
The recently proposed Uniswap v3 replaces the fungible liquidity provider token (LP token) into non-fungible ones, making the design for liquidity mining more difficult. In this paper, we propose a flexible liquidity mining scheme that realizes the overall liquidity distribution through the fine control of local rewards. From the liquidity provider's point of view, the liquidity provision strategy forms a multiplayer zero-sum game. We analyze the Nash Equilibrium and the corresponding strategy, approximately, deploying the liquidity proportional to the reward distribution, in some special cases and use it to guide the general situations. Based on the strategic response above, such a scheme allows the mining rewards provider to optimize the distribution of liquidity for the purpose such as low slippage and price stabilization.