RESEARCH NOTE R6 · Research notes · complete derivations
Turn a thesis into a testable LP mandate.
Translate accumulation, distribution or neutral market making into measurable constraints and policy experiments.
A professional LP proposal should be falsifiable: a result should be able to show that the strategy did not work. Start with desired inventory and a benchmark, then design the range, execution constraints and review rules. The highest displayed fee is not an investment thesis.
Jump to the interactive experiment ↓A single-sided range is a conversion schedule
Put only USDC into an ETH range below spot and trades can convert it into ETH as pool price descends. For a completely traversed fee-free range [a,b], USDC spent per ETH acquired is √(ab). Derive it as L(√b−√a) divided by L(1/√a−1/√b). A 2,400–2,800 range averages about 2,592.30 USDC/ETH if fully traversed. It is not a guaranteed fill or a promise that the asset is cheap. If only partially traversed, use actual amounts; external price touching a level does not itself transact.
Suppression and prohibition are different controls
A high fee against ETH leaving the pool discourages reverse conversion; it is not necessarily a hard prohibition. A direction block, if implemented and enabled by the actual contract, is a different rule. Neither guarantees counterparties will deliver a target quantity by a deadline. Policies act at pool level, so a bespoke accumulation mandate may conflict with another LP’s desire to sell. LP access controls help align participants; they do not constitute a guarantee against loss.
Measure the fee-demand trade-off
In a deliberately simplified single-band scenario, LP fees = eligible volume × LP fee rate × active-liquidity share. If rate doubles while eligible volume falls to 40%, fee income falls to 80% before changing flow quality. This is an accounting identity with assumed inputs, not an elasticity model or a recommended fee. Hook revenue is separate; do not add it to LP income. Actual share changes across ticks and swaps, so production research needs execution-level allocation.
- Q: fee-paying input volume; f: LP fee rate; s: your fraction of active liquidity.
AssumptionsOne fee band and fixed share. Allocate changing fees/liquidity step by step. Excludes other fee recipients and inventory P&L.
Design the experiment before observing the result
Record objective, numeraire, budget, inventory limits, benchmark, expected source of fees, and exit/review conditions. Replay policies using only information available at each decision time; include latency, rejected flow, gas, slippage, hedging costs and parameter-update failures. Separate calibration from out-of-sample evaluation. Stress jumps, depegs, stale data and liquidity withdrawal. Compare net P&L and objective fulfillment alongside fill rate, adverse markouts and time at inventory limits.
ADPP supplies controls; evidence supplies confidence
Position design, directional fees and price bounds are complementary tools. Bounds constrain permitted execution; they do not hedge the value of assets already held. Router policy checks protect a trader from an execution using different checked values; they do not promise best execution or lock market price. Off-chain research can inform settings, but an asserted risk advantage must be measured. A bespoke proposal should identify deployed controls, proposed extensions, decision responsibility and monitoring explicitly.
TRY IT YOURSELF
Make the mechanics visible.
Use assumed volume retention and fee multipliers to test a fee-only break-even question. It cannot optimize a live policy. Return to your position plan and add a benchmark, inventory limit and falsification rule.
Baseline: eligible volume 1,000,000 USDC × LP fee 0.30% × active share 10% = 300 USDC
Both controls are independent assumptions. No demand curve is estimated. Equal period, fixed share, one fee band; excludes hook/protocol revenue, inventory P&L, markouts, hedges and gas. A fee-only improvement is not a net-return improvement or an optimal policy.
CHECK YOUR UNDERSTANDING
What does this mean for you?
Which outcome would make you stop or revise the strategy even if fee APR looked attractive?
CONNECT IT TO AMM MARKETS
From understanding to a real decision.
Bring this mandate to the AMM Markets team. Discuss your objective and risk preferences first, then assess whether an existing market or dedicated policy fits. This lesson does not activate any policy, hedge or automated mandate.
Discuss your objectives and risk preferences ↗Opens Telegram. Your plan is not sent automatically.References and scope
- Uniswap v3 whitepaper · §§2–2.1 ↗
- Uniswap v4 whitepaper · hooks and custom accounting ↗
- Hayden Adams · Correlated Pairs: How AMMs Win the Biggest Markets ↗
Course edition: October 2026. Distinguish protocol principles from product instructions; actual market parameters come from the live interface and on-chain state.