Nansen: Analyze the real market-making situation of Uniswap V3 through more than 20,000 addresses

Why is market maker important?

Market making in finance does not just refer to the equation x*y=k. In the traditional Central Limit Order Book (CLOB) market, market makers specialize in submitting buyer and seller orders. When users trade on FTX, the counterparty may not be a targeted trader, but a market maker! Most high-frequency trading companies, even banks, allocate a portion of their investment portfolio to market-making activities. Well-known market makers include Two Sigma, Citadel and Jump Trading.

Market makers are especially important in traditional markets, because directional traders alone cannot provide sufficient liquidity for the market. This is due to the following reasons:

  • There is information fragmentation. Buyers cannot communicate effectively with sellers, especially when trading long-tail assets.
  • Some market participants require that the transaction be executed immediately, but in reality, the transaction takes time to clear.
  • Liquidity is affected by the asymmetry of market sentiment, increasing in a bull market and drying up in a bear market. This can be reflected in the dollar value of the open position of Derbit options.
  • The slippage of block trades is high.

These problems obscure price discovery and increase market volatility, often making the market less efficient. In DeFi, the lack of market makers that provide liquidity can explain why the price of newly issued tokens fluctuates greatly. This is why users should set up smart alarms for large transfers based on the depth of the token’s liquidity.

Why make a market? ‍

Market makers in DeFi can profit from transaction fees and liquidity incentives. This is not much different from traditional market makers who profit from the bid-ask spread (the difference between a buy order and a sell order).

Income is also accompanied by risks. DeFi users are afraid of impermanent losses, while traditional market makers try to reduce the risk of asset prices changing over time. Market making is traditionally a complex business, and institutions compete in many ways. They constantly adjust spreads and transaction amounts, buy hedging instruments from the derivatives market, and execute lightspeed orders on low-latency software.

Because of this, making market in the central limit order book market is very difficult for individual traders. Although there are programs that can help you do it, organizations have scale advantages in almost all aspects.

Enter automated market making

Automated market makers introduced the concept of “lazy market making”, which completely subverted the original market making model. Assets in DeFi will be deposited in a contract called a “liquidity pool”, and various traders can trade through the liquidity pool. This is “automated” because the asset price in AMM changes according to a predefined mathematical formula. One of the formulas is Uniswap’s constant product formula x*y=k, x and y respectively represent the reserves of two tokens in the fund pool, and the multiplication of the two tokens must always be equal to the constant k. This article is a good introduction to AMMs.

Over the years, other AMM formulas have also been developed, each with its own price curve. They all have one characteristic in common: market making is automated and may be easy.


Enter Uniswap V3

Uniswap V3 has significantly improved the AMM model. It increases customizable liquidity positions by allowing users to pool assets within a pre-set price range. Users can treat a single V3 liquidity position as an AMM with x*y=k, but it is only applicable within the set price range. Quoting Dan Robinson’s work, the relationship between assets in a single V3 position can also be expressed by the following formula:


The “offset” here refers to the function that sets the lower and upper limits of the price range in V3. As mentioned in the previous article, this greatly improves the capital efficiency of assets in the liquidity pool, enabling users to customize their overall market-making positions by holding different liquidity positions at the same time.

However, the improvement of capital efficiency comes at a price, and users may face the risk that the market price of market-making assets exceeds the set market-making range. For example, a user provides liquidity for the ETH/USDC trading pair within the price range of 1,000-2,500 U.S. dollars. When the price of ETH drops below 1,000 U.S. dollars, the user ultimately only holds ETH. When the price of ETH exceeds 2500 USD, users will only hold USDC in the end. In both cases, the user’s assets are no longer able to earn fees, and the single asset held may face downside risks.

This is the difficulty of market making on Uniswap V3. Providing liquidity is no longer simple and passive, but requires timely monitoring and strategic adjustment. In this article, we use on-chain analysis to discover the real situation of Uniswap V3 market making.


Each Uniswap V3 position is represented by a unique NFT, and we analyzed data on 5 different events related to liquid position management.

  • Increase liquidity (IncreaseLiquidity), decrease liquidity (DecreaseLiquidity) and transfer (Transfer) events issued by NonfungiblePositionManager.sol
  • Minting and Burning events issued by UniswapV3Pool.sol

Integrating the data from these events together, we can discover the update frequency of a particular liquid position (such as NFT). Through the Transfer event, we can determine the ultimate owner of the NFT position. If the ultimate owner is the destruction address, the penultimate owner is considered the owner of the NFT position.

From a hypothesis Ethernet Square branch address to another address of the Ethernet Square NFT ultimately belong to the same owner, because there is no trading Uniswap V3 NFT positions open market, there is no reason to direct users to purchase NFT, rather than trying to buy the corresponding underlying assets Provide liquidity again.

If Uniswap V3 liquidity providers are actively managing liquidity, they may frequently change their liquidity positions, which can be achieved through off-chain algorithms or on-chain contracts. We conducted a short tentative analysis to understand how Uniswap V3 is used by liquidity providers.

Among all current users who hold Uniswap V3 positions, 58% of addresses have only 1 liquid position, and less than 10% of addresses have more than 5 NFT positions.

By summing the number of occurrences of the “increasing liquidity” and “decreasing liquidity” events of a specific address, the number of activities of the address can be obtained, which includes the activities of the NFT that has been destroyed by the address. We draw the following scatter chart for the number of positions held by each address and the number of activities.


The trend shows that the number of activities of a certain address always exceeds the number of positions he has. Few addresses have more than 150 NFT positions. We can also infer that the increase in the number of activities exceeds the increase in the holding positions.

Let us classify the data and add different colors, as shown below.


“Simple Passive” means that an address has only one Uniswap V3 position and no changes have been made to it. In various senses, it represents a “lazy” liquidity provider. “Complex Active” refers to liquidity providers who have multiple positions and actively manage them. If the number of activities is greater than the number of positions held, this can be inferred, using 2 as the threshold for judging whether it is active.


We found that a total of 22,864 addresses have or have held positions on Uniswap V3, and a large portion (77%) of them are regarded as “passive liquidity providers”, which means that they have hardly changed since they minted NFT Through liquidity positions. 14% of addresses are classified as “Simple Active”, and less than 1% of addresses are “Complex Active”.

There are only 8 “complex and passive” liquidity providers. We speculate that most of them are staking pools for certain projects, such as Raini’s V3 liquidity provider staking pool, but 6 of the 8 addresses are actually wallet addresses (Not the contract address).

Historical patterns of liquidity supply

By tracking the daily historical minting and destruction of coins, we can observe the historical liquidity supply pattern from May to June 28. Some tentative observations can be made, but further testing is needed to verify.

  • The sudden “surge” of liquidity at a specific price may cause the relative ETH price to change the next day.
  • Since mid-June, the overall liquidity depth has generally declined.

How does the liquidity in the ETH/USDC pool change with the price of Ethereum? Compare the ETH price corresponding to 25%, 50%, and 75% liquidity with the ETH/USD price. As shown in the figure below, it can be inferred that liquidity is usually concentrated in these ranges.


In May, the liquidity distribution on V3 changed closely with the price of ETH. This makes sense, because market makers can adjust their positions to earn more fees. However, since mid-June, the liquidity of V3 has not kept up with the fall in the price of Ethereum. As the price of ETH fell below $2,000, liquidity providers on Uniswap expanded their market-making scope, and the price gap between 25% and 75% liquidity widened. Will this trend continue? Only time and data will tell us the answer.

Concluding remarks

Active liquidity management is still in its infancy in DeFi. Visor Finance’s current strategy is to derive Bollinger Bands from the ETH/USD price to create an expected range of active liquidity. Charm Finance runs a passive rebalancing strategy to ensure that the concentrated liquidity range can “catch up” with market prices.

As the data shows, the potential of Uniswap V3 has not yet been exploited. Passive and simple liquidity positions still dominate, and most positions are managed in a casual, unoptimized way. This is an excellent opportunity for the new protocol to build an automated chain strategy to help users proactively manage liquid assets and make market making popular for daily DeFi users. Their success is inseparable from the success of Uniswap itself.

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