Final project developed for Advanced Solidity Bootcamp with Encode
VolatilityDynamicFeeHook is a smart contract designed to work with Uniswap v4 as a hook. It implements a dynamic fee mechanism that adjusts based on the price volatility of the pool. This contract aims to optimize liquidity provision and trading by adapting fees to market conditions.
When a pool is initialized, the contract sets a fixed base fee (0.3%) and records the timestamp.
The contract tracks the minimum and maximum ticks observed during a 24-hour period. Every 24 hours, it calculates a new fee based on the range of ticks observed:
The wider the range (higher volatility), the higher the fee, up to a maximum of 5%. The fee is calculated as a proportion of the maximum tick range (4055 ticks which correspond to a 50% price change). Calculated fee is added on top of fixed fee (0.3%).
- Optimized Liquidity Provision
The dynamic fee structure encourages liquidity providers to maintain their positions even during volatile periods, ensuring deeper liquidity in the pool.
- Volatility Protection
By increasing fees during high volatility periods, the hook helps counterbalance the risks of impermanent loss for liquidity providers.
- Balanced Trading Environment
Higher fees during volatile periods can help reduce excessive speculation and promote more stable trading conditions.
- Apply the higher fee only to higher risk token (eg. when volatile token is sold to pool);
- Instead of updating the fee once every X hours, implement a 'moving window' technique to allow faster response to market conditions.
requires foundry
forge install
forge test --mc VolatilityDynamicFeeHookTest
Additional resources:
v4-periphery contains advanced hook implementations that serve as a great reference
A hook that adjusts the lp fee (swap fee) based on the volatility of the pool tokens.
To familiarize with the uniV4 and how hooks works.
A non comprehensive overview
V4 is using the concentrated liquidity (same as V3) but:
- Singleton Design
- Flash Accounting:
- useful when interacting with multiple pools. (eg. ETH/USDT -> USDT/DAI)
- tokens transfer are performed at the end
- Native Ether
- Dynamic Fees
- Hooks (new to V4)
- uniswap hooks are smart contracts that can be attached (in initialization phase) to liquidity pools
- inject your own logic to extend the behavior of liquidity pools
- hooks can be called at 4 different actions: (
initialize,add/remove liquidity,swap,donate) x (before,after) + 2 special cases (NoOp hooks)