Unipilot and Popsicle.Finance: $6bn+ TAM for Liquidity Optimization

In case you missed the discussion of Uniswap v3 from last week, you can check it out here.

Unipilot launches on Thursday of this week, and it’s worth diving into as a case study to expand upon the Uniswap v3 piece from last week. As mentioned, concentrated liquidity allows for increased capital efficiency and fee generation. However, keeping capital ‘in-range’ is difficult, and failure to do so can lower fee generation to zero, cause huge amounts of Impermanent Loss, and force hundreds of dollars in gas fees.

At the same time, active management of fee ranges allows for even more concentrated fee generation, while simultaneously minimizing IL, at the cost of gas. That gas cost can be prohibitive for smaller investors, leaving them stuck in Uniswap v2, incapable of taking advantage of the fee boosting qualities of the later version.

The initial hype behind Uniswap v3 was real, and it was a real opportunity to offer a novel and differentiated product to the largest DEX on the market. As we can see in the trends, mentions of v3 started high initially, before trailing off. The recent growth in v3 optimization projects, like Popsicle.Finance and Unipilot has caused increased discussion in the topics. V2 - or what is now standard 'full-range' (0, inf.) liquidity pooling - has decreased in tandem with mentions of v3.

Diving into the data a little more turns up some interesting figures. Uniswap v3 did gain some share in total number of trades upon its introduction, but that share has remained roughly flat. Despite that, the fees that it's generating are generally 2-4x higher.

This is likely because Uniswap v3 has captured the majority of the total volumes. Why is this? It's likely because the majority of base pairs: ETH, WBTC, DAI, etc... are more stable and have more liquidity provided through Uniswap v3. They're also more likely to have liquidity provided through larger sources, like yield farms, who can afford to make more frequent changes to their ranges. So, although the majority of volume currently traded on Uniswap is already being captured by v3, there is still an opportunity of ~150,000 trades to be captured by improvements to the range system that allow it to be usable by smaller protocols and liquidity providers.

To make it simple- the opportunity for v3 optimization is huge. At this moment, Uniswap shows $5.75bn in TVL on v2 vs. $3.90bn in v3. That is nearly $6 billion of capital that is being used inefficiently, lowering returns for providers and depth for trades.

If that capital can successfully be moved into v3 pools, whether through improvements in structure or through optimization programs, the difference could be in terms of millions of dollars a day. Moving all of the LPs in v2 into v3 would more than double the number of current v3 LPs and almost triple the capital in pools. Assuming even a $2mn/day increase in fee generation creates a ~$730 million a year opportunity, just by updating existing capital.

Popsice.Finance ($ICE) and Unipilot ($PILOT) aim to attack the optimization problem from two different angles, both with incredible potential. @Danielesesta is the founder of Popsicle.Finance, and the operator of a broad DeFi ecosystem, encompassing $SPELL, $MIM, $ICE, $TIME, and $MEMO.

Through ICE, he is seeking to create a layer within that ecosystem, allowing users to gain exposure through certain, more stable v3 pairs. Currently, ICE offers farming on stablecoins, $SPELL, $SHIBA, and even $ELON pools (all paired against WETH). These pools pay from ~20% APR up to over 500%. If yield farming isn't your thing, you can farm $ICE governance tokens instead through the aptly named 'Popsicle Stand'. By staking these $ICE, you receive $nICE, an asset constantly increasing in value relative to $ICE, so cashing out of your stake yields both share of fees and likely a greater number of $ICE than you put in.

Popsicle.Finance gets especially interested when viewed together with its sibling, abracada.money ($SPELL, $MIM). As mentioned above, you can earn extra yield by pooling some of shared assets in Popsicle- but that's not all. One of the creators, Squirrel, has noted plans for increased synergy across the platforms. Say you wanted more pool exposure than you were able to get through your initial capital. You could then take your USDC/WETH LP token from Popsicle to Abracadbra. You could then deposit that as collateral into their (again aptly named) Degenbox, and withdraw Magic Internet Money, a cross-chain stablecoin, against it. This lending strategy has been tremendously popular; $MIM's total supply is approaching $3 billion and a top 50 market cap. It works, primarily, because all of these platforms are cooperated, so counterparty risk isn't quite as high.

That said, the number of available pairs to provide liquidity for on Popsicle is still fairly low: I counted only 14. So unless you're already looking to trade a popular pair, this likely isn't the place for you. Plus, given affiliations, it's also not a pure v3 optimization play. So, what option do you have?

Unipilot seeks to answer the liquidity optimization question in a slightly different way. Unlike Popsicle, which offers set pools that they're comfortable providing liquidity for, Uniswap plans to allow any user to create a 'vault' for a pool. Once that vault has been created, any subsequent users can simply join the vault to begin generating optimized v3 fees.

Vaults get rebalanced when out or range with the help of a captain, who sends a transaction through the dApp or by running their bot code. Upon optimizing the vault, the captain is reimbursed the gas fees, plus a 20% premium (paid in $PILOT), as incentive.

Upon withdrawing LP, users can claim fees in one of two ways. Either the user can claim their fees in the pair provided, less a 15% fee paid to the Index Fund (read: Treasury); or, the user can elect to claim 95% of total fees in $PILOT token, with the pair then placed into the Index Fund. Through this mechanism, Unipilot's Index Fund will be able to amass a wide variety of tokens through the various fee pairs on the site. Those tokens will serve as the backing for $PILOT. At any point, the token can be burned to redeem an equal portion of the funds from the Index Fund.

Pilot also adds a two major quality-of-life tools to the dApp to incentivize growth: single token liquidity (e.g. Provide only ETH for USDC-PILOT LP) and interest-free loans (like abracadbra.money, but likely with lower LTV) collateralized against liquidity positions. If they accomplish what they've set out to build, Unipilot's ecosystem could grow to rival peers as a one-stop-shop for v3 liquidity provision, leverage, and yield.

In any scenario, Uniswap v3 yield optimization promises to be an incredible area of growth in the near-future, as everyone wants to get their hands on the $6bn and 150,000 daily trades that remain in v2.

This report is for informational purposes only and is not investment or trading advice. The views and opinions expressed in this report are exclusively those of the author, and do not necessarily reflect the views or positions of The TIE Inc. The Author may be holding the cryptocurrencies or using the strategies mentioned in this report. You are fully responsible for any decisions you make; the TIE Inc. is not liable for any loss or damage caused by reliance on information provided. For investment advice, please consult a registered investment advisor.