Is a range order a limit order? | Uniswap V3 analytic series 2 new characteristics

In Uniswap V2, traders can only choose to trade at the current market price. The lack of native limit order functionality at the protocol level in V2 makes it difficult for users to apply the usual stop-profit or stop-loss strategies on Uniswap.

This issue has finally been resolved in the latest update to the V3 version.

How to construct "limit order" on AMM

As we mentioned in the last article, when an LP sets a market-making price range that is completely above or below the market price, the LP must provide a single currency for market-making. So what happens if we provide liquidity in a range that is well above the spot price and narrates the price range for market-making?

Let's take the ETH-USDC trading pair as an example.

Assume that the ETH spot price is $2000 and the LP is in the range of $2300- $2310, all providing liquidity in ETH. So when the ETH price rises to $2300, the ETH provided by LP starts to be gradually converted into USDC. If the price of ETH continues to rise thereafter, the proportion of USDCs in LP assets will continue to rise until the spot price reaches $2310, when the assets are all converted into USDCs.

And we can also prove mathematically that,The average transaction price of ETH sold in this manner is equal to the geometric average of the market-making range of LP.

That is$2304.99.

At this time, we found that if the original purpose of LP market making is to sell out all their ETH positions at a price of around $2300 to $2310 to stop profit. So the liquidity he provided in V3, he did a pretty good job of doing that.

Continuing with the previous example, if we further narrow the market-making price range of LP to the limit of $2300.00- $2300.01. At this point, we can approximately think that LP put out a limit sell order for ETH at a price of about $2300. As long as the market price is higher than US $2300.01, all the ETH provided by LP will be sold and converted into USDC. This operation can also be regarded as helping LP to complete the operation of selling ETH at a limited price.

This kind ofRange Orders are the aggregated liquidity offered in a single currency above or below the spot price at an infinitely narrow Range of the LP's market-making price.. At the same time, we can call the range order that helps LP to stop profits within a certain range in the example above asProfit- Taking Range Orders.

So, actuallyA "range order" is not an actual order per se, but rather aggregated liquidity provided by LP to a particular price point in the pool. While not an actual order, the "range order" exhibits features that closely mimic the basic function of a limit order.

What's the difference between a range order and a limit order

If a "range order" is so similar in function to a limit order, why not just call it a "limit order" instead of a different name?

We know that,On traditional order-book exchanges, when a limit order is traded, funds or assets are automatically returned to the investor's trading account until the investor issues the next limit order. However, the "range order" in the V3 version is different. When the order is fully executed, the LP's funds will still be locked in the original pool and can be reversed again.

In other words, if the investor wants to sell the ETH at $2300 through the range order, then after the "range order" has been completed, the LP must withdraw liquidity as soon as possible before the ETH price falls back to $2300. Otherwise, if the price falls back below $2300, the "range order" will automatically "buy" the sold ETH at $2300 and "roll back" the sold ETH.

V3 version of Uniswap is not an order book exchange

By this point, many readers may have noticed that there seems to be no particularly clear line between "range orders" in V3 and ordinary liquid market making.

For example, we can consider a market-making in the range of $2,000.00 - $2,000.10 as a separate "range order". But it can also be said that this kind of liquid market making is equivalent to submitting 10 "range orders" of different prices at the same time within 10 smaller price ranges (e.g. 2000.00-2000.01, 2000.01-2000.02......). .

(Note: V3 is not implemented in $0.01 as the base unit, but in multiples of 1.0001. The model is simplified here for easy understanding.)

If we think of it this way, then the entire liquidity of Uniswap can be broken down into an infinite number of "range orders" based on the smallest unit of price change.A price curve of any shape can be mapped to an order book consisting of a number of minimum "range orders" in exactly the same way. In other words,The V3 version of Uniswap already has the characteristics of a partial order book exchange in the underlying logic.

However, because the "range order" in V3 is still different from the limit order of a real order book exchange, it is necessary to withdraw funds from the liquidity pool after each minimum "range order" has been executed in order to fully simulate the status of an order book exchange in V3. And the withdrawal of liquidity operations, is still expected to need LPs to complete manually. This not only increases the frequency of operations, but also changes the current LPs' habit of passive management. So,The V3 version of Uniswap does not yet count as an order-book exchange; the core of its trading logic is still an AMM-based automated market making mechanism. However, it must be admitted that V3 builds on the underlying logic of classic AMM and maximises the benefits of the order book mechanism to provide a better experience for traders.

In addition, I expect that after Uniswap V3 goes live, most LPs will continue to adopt the traditional passive market-making strategy of choosing a price range and providing liquidity for a long time. Submitting and withdrawing a "range order", after all, requires the payment of gas in real terms, which is clearly not an economic option in terms of current Ethereum transaction costs.

It can be seen that after the completion of the upgrade of Uniswap version 3, the new protocol not only absorbs some of the advantages of the order book exchange, but also retains the advantages of the classic AMM, which can be said to have completed an important evolution in the product form.

So, when Uniswap gets the function of aggregated liquidity and range orders, will its typical classic price curve remain the same? In the next video, we're going to look at the price curve in more detail.

Link to the first article in this series:

What changes will the converged liquidity feature bring to LP? | Uniswap V3 analytical series of new features (a) :https://www.theblockbeats.com/news/23516

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