Applying Traditional Finance Portfolio Margin Risk Strategies to Uniswap v3 Collateral in DeFi Lending

Abstract

Decentralized finance liquidity providers (LPs) who use their Uniswap v3 positions as collateral on lending platforms such as Aave often face liquidations because these platforms rely on fixed Loan-to-Value (LTV) rules. These rules do not account for Impermanent Loss which can increase rapidly when asset prices move outside an LP's chosen price range. To address this, we simulated Uniswap v3 LP positions using historical ETH/USD price data and compared the standard fixed-LTV lending model with a hybrid risk-management framework that incorporates stress testing and dynamic exposure reduction. Under the conventional 65% LTV model, liquidations were frequent, with 39,649 liquidation events observed over roughly a decade of daily price data (2015-2025). The proposed framework reduced liquidations by 97.66% while maintaining healthier collateral positions, achieving this through adaptive reductions in effective leverage rather than full liquidation. These findings suggest that incorporating impermanent loss-aware risk controls into DeFi lending protocols could significantly reduce liquidations while keeping leveraged positions safer through periods of volatility. By combining the accessibility of DeFi with the risk management techniques used in traditional finance, lending platforms can become more stable and efficient, benefiting liquidity providers.