Uniswap
Uniswap Protocol | system of smart contracts for automated token exchange on Ethereum. |
Uniswap Exchange | opensource front-end interface for traders and liquidity providers to easily interact with Uniswap’s smart contracts. |
Pool | ETH-ERC20 exchange contract. |
Liquidity Providers | can be anyone who is able to supply equal values of ETH and an ERC-20 token to a Uniswap exchange contract. |
UNI-V1 | ERC20 tokens which are minted by LPs from Uniswap V1 exchange contract and can be used to withdraw their proportion of the liquidity at any time. |
Traders | exchange one asset for another asset. |
Arbitrageurs | maintain the price of assets within that portfolio in accordance with the market price in exchange for a profit. |
Exchange fee | 0.30% is added on to each trade and is proportionally split between UNI-V1 token holders AKA Liquidity Providers. |
Market Function | Constant Product x∗y=k |
Liquidity provisioning within active pools is proving to be a great alternative to hedge your assets as exchange fees generated seem to be outpacing any impermanent losses incurred. Past few weeks we’ve witnessed some of the most volatile times in crypto history. Extreme volatility resulted in increased volume, especially around stable tokens such as DAI and USDC as many rushed to exit their crypto positions. For example, on March 13th alone, DAI<>ETH LPs proportionally earned ~$75,000 for processing ~$25M worth of swaps!
Before entering a Uniswap Pool make sure you understand the concept of impermanent loss which was covered here or here so you’ve have clear expectations on gain and loss potential.
Broadly speaking, there are three types of pools to consider within Uniswap:
Pegged Pools
Low risk/ low reward.
Some have extra incentives: e.g. ETH-sETH.
These pools are for tokens pegged to ETH, meaning you maintain full exposure to ETH while collecting trading fees AND accruing SNX rewards from Synthetix if you stake your LP. We've been experimenting with zUNI tokens which "Chai-fi" your LP staking experience while automatically re-staking accrued rewards. Keep in mind zUNIs haven not been deployed on the mainnet yet, we want to make sure these are thoroughly tested.
Stable Pools
High risk/ high reward.
e.g. ETH-DAI.
These pools are historically popular with traders and often generate a good deal in fees. There is risk of missing out on ETH returns should its price break significantly upwards (or downwards). But if the fees are high enough, they typically beat this opportunity cost.
Token Pools
For existing token holders of underlying ERC20 tokens OR active liquidity providers looking for extra yield/diversifying assets.
e.g. ETH-MKR.
If you’re already exposed to tokens, there is little harm in supplying liquidity to established pools. Still make sure to do thorough research before making the decision.
If you’re just starting out as a liquidity provider, try sticking with established pools that have deep liquidity, high trading volume and lots of other liquidity providers.
Avoid low liquidity pools. There is no reasonable expectation of profit starting a new pool or contributing to low liquidity pools as an individual.
Also use caution interacting with pools whose tokens are highly specialized. For example, deflationary token supply mechanisms may severely impact returns.
DAI Pool Analysis Example | Block [Time] |
| #8,957,433 [Nov-18-2019 04:15:18 PM +UTC] |
| #9,692,210 [Mar-17-2020 11:58:52 PM +UTC] |
HOLDING 100% ETH:🔻35.97%
HOLDING 50/50 ETH/DAI:🔻17.98%
DAI LP:🔻10.07% 🔥
Why? Because if you have 1/10 of all liquidity in the pool, you will generate 10% of all trading fees (.30 % paid by traders) but let's say someone adds double the liquidity -> now proportionally you have 1/20. Given the same volume, you will generate less fees since you will only be receiving 5% of all trading fees.
You make the highest returns when there’s high trading volume and low price change between the pair. Or when price is volatile but goes back to the ratio you started with.
You make the least returns when there’s low trading volume and high price change.
LP Net Gains =
ETH + ERC20 proportions @withdrawal
minus
ETH + ERC20 proportions @entry
*This result would be the difference between the trading fees and the impermanent loss when you withdraw.
Additional Resources:
This report is based on a cadCAD model of Uniswap by Markus Buhatem Koch
In order to mint pool tokens, you are required to deposit an equivalent value of ETH and ERC20 tokens.
So providing liquidity on an ETH/DAI pair could require you to trade half your ETH exposure for DAI in order to participate.
Zapper enables liquidity provisioning with a single asset (ETH or ERC20 tokens).
Ideal for those who don't have required underlying ERC20 tokens.
Save 3 or more on-chain transactions to mint Uniswap pool tokens.
Note: slippage will increase with larger deposits because your input is being proportionally exchanged to obtain underlying assets required to join the pool with. In order to prevent unnecessary losses due to this price impact, currently the slippage limit is set to 5%. This means that if your exchange transaction experiences greater than 5% difference between the market and estimated price due to trade size, the transaction will revert.
Walk-through:
Connect your digital wallet. No wallet? Get one.
Navigate to the Invest tab.
Type in Uniswap in the filter & click Add liquidity next to the pool you would like to join.
Enter how much liquidity you would like to add in ETH or ERC20s (fiat coming soon). Token balances show up in the drop-down if you have them available.
Confirm the transaction & you will receive Uniswap V1 or V2 tokens which are ERC20 tokens that track your liquidity provided to the protocol.
Add liquidity to ETH/AMPL pool + stake your pool tokens in the 'Geyser' to receive extra AMPL rewards.
