How to provide liquidity profitably on Uniswap V3
Uniswap V3 allows liquidity providers to do "concentrated liquidity", putting their assets in a narrow range to generate more rewards on the position. That sounds great, but a study showed that HALF of liquidity providers lose money with Uniswap V3! Uniswap accidentally created a "foot gun". How can we provide liquidity profitably on Uniswap V3?
The short answer:
  • Choose the correct range
  • Active pools
  • Low TVL pools
  • Non stable pairs
  • Choose WETH/X pairs
How to choose the correct range for your liquidity?
Putting liquidity in a tight range sounds good, but what happens when price leaves that range? Now you have a choice: unstake your assets and collect your fees, or swap and recreate the position. Every time you swap, add, or remove liquidity, you pay in fees and/or slippage. Even worse, tight ranges suffer more from impermanent/divergence loss.
The best range is one where price always stays in your range and you don't have unused capital. How can you know what range price will stay in? The easiest way is to look at the previous time period and use that range. For example, if you plan to provide liquidity for a week, put it in the range that price traveled last week. If you want to stake WETH/USDT and last week price went from $1,350 to $1,500, that's your range: $150 from lower to upper limits.
What if you want to provide continuous liquidity for an undetermined amount of time? You have to decide how often you want to rebalance the pool. Based on my case studies, an agressive rebalance plan would be more than 1x per week, a moderate rebalance plan would be 1x per month, and any less than that is passive. Fees and slippage are too hard to overcome with daily rebalances. does this for you automatically. If the market becomes more volatile, the range increases on the next rebalance. If the pool is sleepy, the range shrinks to get more fees.
Choose active pools
There are some pools that are HOT! Maybe the coin has a new product, new narrative, or new release. It's a good idea to provide liquidity for the most active pools. What is "active"? Generally, it's when 24H swap volume is greater than TVL (total locked value).
Don't freak out if activity drops for a few days or even a few weeks. Sometimes the entire market is quiet, like around holidays or summer breaks.
Choose low TVL (total locked value) pools
The less TVL is in a pool, the more rewards your position will collect because your position is a higher percentage of the pool. Don't be too judgemental about TVL, because liquidity is coming and going all the time. TVL can change +-30-50% in 24 hours. Also, the ranges of other positions could be larger, giving you solid rewards even though TVL is high. When in doubt, try out the pool and keep an eye on your rewards. If they're good, stick with it!
Since this is so personal and variable based on the pool positions, I'll leave it up to you to check the APR and rewards your position is making and let you decide.
Choose non-stablecoin pairs
Everyone has the same idea: since USDT and USDC are supposed to be 1:1, why not have a tiny range and collect max rewards? There are several problems with this: TVL, low rewards, and tail risk.
Stablecoin pairs often have high TVL which dillute your position. Even worse, they have the lowest swap fees of any pair, giving the least rewards. Gross.
The third problem of stablecoin pairs is tail risk: losing the peg, blacklisting, and regulation.
What if the stablecoin loses the peg? Every single stablecoin has lost the peg at some point. Some stables regained the peg (USDT, USDC). Others didn't (UST). This is a textbook case of picking up pennies in front of a steamroller.
Almost all stablecoins have blacklist functionality. If the issuer doesn't like your wallet, they can freeze your funds. It might not even be you they're after: they might shut down the pool you're in because of someone else's bad behavior! What if governments force the issuer to act against your wallet? There's nothing you can do. They didn't put the blacklist functionality in there to NOT use it.
Finally, there's regulation risk. Stablecoin issuers often operate with the approval of a government. In 1930, the United States government seized all the gold because people were fleeing the dollar. Yeah, they didn't teach you that in school, did they?
Choose WETH/X pairs (or MATIC/X, BNB/X)
Crypto tends to move together, just like the stock market. If BTC is going up, ETH is probably going up too. This means you can have high swap volume with fewer rebalances as crypto tends to be correlated with itself. The best pairs will include the base currency of the chain (ETH, BNB, MATIC) because those will be the most used and most liquid.
Uniswap created an amazing tool with V3, giving users better swaps with lower fees. While Uniswap V3 gives more tools to liquidity providers, it also increases the difficulty over V2. I created to solve my own problem: how can I put my crypto to work for me, generating max rewards with less risk? Try it out.
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