Providing Liquidity: Uniswap V3 vs Alcor Finance (USDC-WETH pool)
Today we will show how providing liquidity in Uniswap V3 and providing liquidity for selling options on Alcor Finance are very similar in nature.
Moreover, in this article we will show that providing liquidity in Uniswap V3 is less profitable than selling options on Alcor Finance.
We will consider the USDC-WETH pool.
Uniswap V3 position
Let’s take a look at the graph of the total value (of assets) of a Uniswap V3 position depending on the price of the underlying asset — we have already covered this in “How to Hedge Uni V3 positions with options” article.
In fact, any Uniswap V3 position risk-profile is very similar to the risk profile of a Covered Call options seller:
Thus Uniswap V3 liquidity providers are effectively selling covered call options with the time to expiration. And the premium for selling such an option is received in the form of position fees earned.
The larger the trading volume, the more Uniswap V3 positions will earn fees. At the same time, if the asset price is out of the price range, then the Uniswap V3 position does not earn commissions.
In the article https://medium.com/@kirill.bogomolov95/on-chain-options-based-on-uniswap-v3-pools-d87184a9400f it is shown that, under certain favorable conditions, fees of Uniswap V3 position can be equal to the fair value of the corresponding covered call option.
A more detailed analysis shows that in most cases the fees earned by a Uniswap V3 position are not enough to cover the premium of the corresponding covered call option sold. Thus, Uniswap V3 liquidity providers of the USDC-WETH pair sell options cheaper and receive fees less than fair amounts.
Alcor Finance changes the game
Alcor Finance’s liquidity providers add liquidity to either buying or selling options. They set the option price range at which they want to buy/sell options. When an option price is within the selected price range, liquidity providers automatically buy/sell options and instantly receive options premiums.
Moreover, a commission of 0.025% is charged for each swap if the option is bought and 0.1% if the option is sold. Thus, liquidity providers receive additional trading fees on top of option premiums.
