Proposal to ramp 3pool A parameter to 2000, or to discuss alternative values.
Our recent simulations (A Parameter Research [Demo and Code]) suggest that an A parameter of ~2000 would maximize returns for 3pool by increasing arbitrage volume. This would also substantially reduce slippage (est. ~2.5x more pool depth) relative to the current A value of 600. The primary risk is increasing pool imbalance; however, imbalance risks are largely mitigated by the large size of 3pool, and market-wide liquidity for all coins in 3pool.
- Increase expected returns for 3pool LPs. Simulations including arbitrage alone suggest an increase of about 0.1% in annual returns (in USD). Note that this estimate is conservative given that it only includes purely optimal arbitrage trades (i.e., those trades that benefit traders the most).
- Decreased slippage. Simulations suggest that pool depth (the cost to shift the pool price by 0.05%) would be increased by ~2.5x. Increased price stability is likely to attract more non-arbitrage trading as well.
- Increasing A increases the risk of pool imbalance. However, due to the large amount of capital in 3pool, and high market-wide liquidity for the coins in 3pool, this risk is largely mitigated. Simulations suggest a decrease in average balance of ~0.15 from 0.85 to 0.73, where 1 is optimal balance and 0 is complete imbalance.
- Another, slightly lower A value may be preferred if the community is particularly concerns about holdings imbalance.
We supplemented our previous simulations by (a) including gas fees, and (b) estimating volume-weighted price depth.
The results were unaffected by any reasonable gas price, because gas fees only made up a very small proportion of the typical arbitrage trade size (ranging from the $100,000 to $10,000,000 range).
Using volume-weighted price depth allowed us to emphasize price depth “when it matters most” (i.e., when there is high volume). The results were largely unaffected by using volume-weighting, but showed that price depth is actually slightly improved for higher A when considering volume.