On Liquidity Mining for Uniswap v3

TL;DR

This paper introduces a flexible liquidity mining scheme for Uniswap v3 that uses local rewards to control liquidity distribution, analyzes strategic behaviors, and aims to optimize liquidity for low slippage and stability.

Contribution

It proposes a novel reward control scheme for liquidity mining in Uniswap v3 and analyzes strategic provider behaviors to improve liquidity distribution.

Findings

Liquidity provision approximates Nash Equilibrium strategies.

The scheme enables optimized liquidity distribution for stability.

Analysis guides reward design for better market outcomes.

Abstract

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.