Medallion
A competition platform to increase LP yields
Medallion will be launched after Uniswap V4 launches.
The problem
Most liquidity providers (LPs) are not profitable. They lose over 20% a year to arbitrageurs, resulting in losses exceeding $500 million each year. The LP losses are known as loss-versus-rebalancing (LVR).
Reducing LVR will recover the losses, and LPs will earn higher yields.
LVR reduction is one of the most important unsolved problems in crypto. In a world with less LVR, on-chain liquidity will be substantially improved, and the user experience on DEXs can be at least as good as CEXs. As on-chain trading volume increases, LVR will also increase, which leads to more demand for LVR reduction.
There are many strategies to reduce LVR, such as dynamic fees, auctions, and using an oracle; but given the size and complexity of the problem, it’s unlikely one strategy will always be the best. This is why a solution is required to automatically select the best strategy from all the possible strategies, so that LPs earn the highest yields. Medallion uses a competition platform to select the best strategy.
The solution
Medallion is a DEX where LVR-reduction strategies compete to earn the highest yield for LPs. It has a public auction where competing strategists submit bids - the highest bidder pay their bid to LPs, attach their strategy to a pool, and earn all the pool’s swap fees.
Medallion expands the capabilities of the am-AMM, so that the widest range of strategies can compete in Medallion’s auction. The increased competition results in higher bids, better strategies, and higher LP yields.
Medallion is open and permissionless, which means anyone can:
Provide liquidity into any range to earn the auction bids.
Create any LVR reduction strategy.
Place the highest bid at any time to attach their strategy to a pool.
Further details can be found in Medallion’s white paper and draft contracts.
Key features
Strategy Contract & optimised earnings
Swap fees are the source of earnings for LPs. If the fees of each swap can change automatically, it will be possible to optimise the earnings of every LP. This is not possible for Uniswap V2 or V3, where the fees for each pool cannot be changed; nor is it possible for newer AMM designs like the am-AMM, where the same fee must be manually applied to all the swaps in a block.
To automatically apply a different fee for each swap, the logic for changing the fee must be embedded into the pool's core logic. The is where strategy contracts and Uniswap hooks come in.
Uniswap hooks inject custom logic into a pool’s core logic, and strategy contracts use Uniswap hooks to inject custom logic to calculate a different fee for each swap. The fee depends on the size, direction and sender of the incoming swap; and can change automatically without requiring a separate transaction. Anyone can create their own strategy contract, and then apply it to a Medallion pool to earn all the pool’s swap fees.
Strategy contracts can be anything, as long as it contains logic to calculate a pool’s swap fees. They can:
Replicate any liquidity distribution and AMM curve.
Replicate order books by setting a different fee for different trade sizes.
Replicate the am-AMM by setting the same fee for all the swaps within a block.
Become an auction where anyone can bid for the right to execute the first swap in a block.
Dynamically set different fees for different LVR signals.
Charge a higher fee for auto-correlated swaps.
Capture all the arbitrage trades in different market conditions.
Become a combination of different strategies.
More examples of strategy contracts can be found in Medallion’s white paper and Github.
In the future, it is likely Medallion users will create a wide range of independently researched strategy contracts.
Medallion’s public auction (see below) determines which strategy contract is attached to a pool, and anyone can attach a better contract at any time by placing the highest bid in the auction. The creator of the contract earns all the pool’s swap fees, and LPs earn the bids.
Public Auction
Medallion’s public auction is permissionless, and is similar to the am-AMM. Managers deploy their own strategy contract, and use the auction to bid for the right to attach their contract to a pool. The highest-bidding manager becomes active and pays rent (i.e. the amount bid) to active LPs at each block. The active manager’s contract automatically sets a different fee for each swap, and the active manager earns all the swap fees generated by the pool. Anyone can place a higher bid at any time to become the new active manager.
Further details of the public auction can be found in Medallion’s white paper and Github.
The flexility of strategy contracts to become any LVR reduction strategy, and the permissionless nature of Medallion’s public auction, allows experimentation, iteration, and continuous improvement of all the strategies applied to a Medallion pool. Medallion LPs will benefit from higher yields, driven by continuously improving strategies, and by higher rental payments from the strategies’ creators.
Conclusion
Medallion increases LP yields by optimising the swap fees generated by a Uniswap V4 pool. Its architecture is decentralised, which means anyone can build any strategy to set the fee of a swap, and then bid in a public auction to recover LP losses and reduce LVR. LPs earn the highest yields from the biggest bids, and strategy builders earn all the fees in a liquidity pool.
Last updated
