Research from Paradigm, Uniswap Labs, and the Wormhole Foundation uses historical examples to explain how technology always leads trading systems.

Electronification, Trading, and Crypto

By [Jason Milionis](https://twitter.com/jason_of_cs), [Austin Adams](https://twitter.com/AustinAdams10), and [Xin Wan](https://twitter.com/xin__wan)

Read the full paper [here](https://uniswap.org/flair.pdf).

The Uniswap Protocol, which has processed $1.5 trillion in lifetime volume since its release in 2018, has pioneered the field of automated market makers (AMMs), serving as a cornerstone of decentralized finance (DeFi). One of the hallmarks of AMMs is that anyone can create a market for any token and provide liquidity without permission – ensuring an equal playing field among all market participants.

The success of these AMMs depends critically on the participation of liquidity providers (LPs), who provide liquidity in exchange for trading fees. Today, we are publishing new research to propose a new metric, fee liquidity-adjusted instantaneous returns (FLAIR), to account for LP competitiveness.
Fee Liquidity-Adjusted Instantaneous Returns (FLAIR)
Economically rational LPs will consider the cost and benefit of being an LP. The benefits can be quantified through trading fees. Costs are a bit more difficult. In addition to general market risk, LPs must also consider how sophisticated their counterparty is. If a trader has better market information than an LP, the LP risks being on the wrong side of the trade and losing money. One popular metric to measure LP performance is loss-versus-rebalancing (LVR), which quantifies the information imbalance between LPs and their counterparties. However, LVR does not factor in a critical component of AMMs: the intra-pool competitiveness over other LPs that are in the same pool.

FLAIR is a new metric for LP competitiveness that supplements LVR, aiming to capture the dynamic behavior of LPs within a pool. FLAIR reflects reasonable economic intuition that LPs increase competition within pools by allocating capital to pools with higher fee returns, rebalancing in-range liquidity, and timing liquidity deployment to high fee periods. In short, LPs that frequently rebalance will earn more fees on average — a factor that is measured with FLAIR.
![flair_plot](//images.ctfassets.net/oc3ca6rftwdu/1smX3THF9TEfj4p99yigZB/2f6c36fa22e3d5295576be67e344c426/plot__1_.png)

*Figure 1: Current models would equate the green and blue pools with low costs (LVR). However, FLAIR separates these by LP competitiveness, showing an important second dimension.*

FLAIR is designed to measure any number of LP positions over an arbitrary period of time, including a single point-in-time. This metric allows both existing LPs to measure historical performance and prospective LPs to optimize future capital deployments with backtests. Researchers can also categorize different strategies and LPs based on their placement on the quadrant plot shown in Figure 1. Solving for the “optimal frontier” will be a portfolio optimization problem.

# Conclusion

FLAIR is not specific to Uniswap v2 and v3 style pools, but is described in our work as a generic formula for most typical cases of AMMs. With some modifications, it can also apply to traditional exchanges – allowing for comparative studies between different market structures and influencing future market designs.

The DeFi landscape is constantly evolving as liquidity provisioning strategies grow increasingly sophisticated. We are excited about this future, and our contribution provides a more holistic view of LP performance. We invite interested readers to consult the [full paper](https://uniswap.org/flair.pdf) for a more detailed understanding.


New research introduces FLAIR, a metric to calculate LP performance that includes LPs competing for trading fees within the same pool.

A Metric to Evaluate LP Competitiveness in AMMs


_By: [Austin Adams](https://twitter.com/AustinAdams10), [Mary-Catherine Lader](https://twitter.com/Mclader), [Gordon Liao](https://twitter.com/gordonliao), [David Puth](https://www.linkedin.com/in/david-puth/), [Xin Wan](https://twitter.com/xin__wan)_

_Read the full paper on [SSRN](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4328948) or locally hosted [here](https://uniswap.org/OnchainFX.pdf)._

***

On-chain foreign exchange (FX) is a new model of global value exchange that offers a faster, cheaper, and more efficient alternative for cross-border payments for businesses and consumers — and address longstanding risks in the FX market. 

This innovation, coupled with more user-friendly interfaces and improved fiat-to-stablecoin conversion capabilities, can benefit billions of underserved individuals worldwide through faster and cheaper transfers, and reduce intermediary steps. [Research](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4328948) conducted by Uniswap Labs and Circle explores these topics in depth, including cross border payments, market structure, remittance, and more.

Based on data from Uniswap Protocol pools, the paper estimates that DeFi rails could reduce remittance costs by as much as 80%, saving unbanked and underbanked individuals $30 billion per year. For a $500 remittance, the cost of on-chain FX conversion and on/off-ramping is as low as $4.80, a small fraction relative to the average cost of remittance of $28.00 through banks and $19.04 through traditional remittance operators.

One example of on-chain FX is the trading of dollar and euro-denominated payment stablecoins issued by Circle, USD Coin (USDC) and Euro Coin (EUROC), on the Uniswap protocol. Since the launch of EUROC in July of 2022, on-chain exchange of the EUROC/USDC pair has surpassed [$124 million dollars cumulatively](https://dune.com/queries/1865638?d=1) as of January 12th, 2023, with daily volume as high as [$8.6 million exchanged on a 24-7 basis](https://dune.com/queries/1865661?d=1).

Other benefits of on-chain FX exchange and settlements include:
1. Atomic, payment-versus-payment (PvP) transactions, enabled through blockchains, can eliminate the settlement risk in which one leg of a transaction is settled without the other. This type of settlement risk, which exists in one-third of deliverable FX transactions or around $2.2 trillion on any given day, is highlighted by global regulators to pose [financial stability concerns](https://www.bis.org/publ/qtrpdf/r_qt2212i.htm).
2. On-chain FX transactions, coupled with blockchain analytics, decentralized identity solutions, and safeguards at the point of on and off-ramps, can improve market conduct and reduce the risks of [benchmark rigging](https://www.bloomberg.com/news/articles/2013-06-13/price-benchmarks-said-to-be-rigged-in-the-foreign-exchange-market) and [market manipulation](https://www.ft.com/content/9a09df46-4f18-11e6-88c5-db83e98a590a) that have long plagued the FX market.
3. Smart contract-based [Automated Market Making protocols](https://uniswap.org/faq) can utilize the balance sheet of passive asset owners as liquidity providers to facilitate always-on liquidity, deepen market depth, and reduce the risk of flash crashes.
4. Near-instantaneous, low cost cross-border settlements can improve payments for global trade and commerce as well as benefit everyday users, such as migrant workers seeking to send remittance home.

Tokenized cash issuers and decentralized exchange protocols are key to realizing these benefits. Tokenized cash issuers serve as a bridge between fiat currencies and their tokenized forms. They must have trust, transparency, and appropriate guardrails in place to ensure backing of the cash tokens, provide redemption on demand, and prevent spillover risks. Decentralized exchange protocols facilitate the price discovery, risk exchange, and settlement of tokenized cash in one currency versus another. They must have proper mechanism design and implementation to ensure transparency, safety, and efficiency.

Regulators recognize that DeFi can be a solution to FX settlement, as evidenced by the recent launch of [Project Mariana](https://www.bis.org/about/bisih/topics/cbdc/mariana.htm), a joint effort from the BIS, central banks of France, Singapore and Switzerland to explore cross-border Central Bank Digital Currency trading and settlements using DeFi protocols.

Lastly, we discuss why the need for regulatory clarity, improved user experience, and safer custody solutions currently presents barriers to broad adoption of on-chain foreign exchange.

***

Please read the full paper [here](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4328948) or locally hosted [here](https://uniswap.org/OnchainFX.pdf).

Uniswap Labs and Circle research shows that FX trading and settlement on public blockchains can be more affordable, transparent, and stable.

How DeFi Can Cut Costs & Boost Transparency in Foreign Exchange Markets

New research about changes for Uniswap v3 TWAP Oracles in Proof of Stake

Uniswap v3 TWAP Oracles in Proof of Stake

Just-in-time liquidity on the Uniswap Protocol

Just-In-Time Liquidity on the Uniswap Protocol

Research demonstrating when passive LP position fees outperform on Uniswap v3 compared to v2

Uniswap v3 Returns More Fees for Passive LPs

New research shows that Uniswap v3 has deeper liquidity than leading centralized exchanges.