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Uniswap V3 Yield Farming

Apr 13, 2023
Uniswap V3 Yield Farming

Key Insights

  • Uniswap V3 allows liquidity providers to supply assets in narrow price ranges, concentrating liquidity for higher capital efficiency.
  • Optimize returns by yield farming crypto through selecting price ranges based on technical analysis of the paired asset markets.
  • Impermanent loss is minimized on Uniswap V3 by reducing divergence between the set range and current price.

Let’s dive in crypto yield farming with a liquidity pool on Uniswap V3.

What is Yield Farming

Yield farming is a way to generate rewards with cryptocurrency assets. It involves lending crypto on DEXs to provide liquidity for trading. In return, yield farmers earn fees and interest on their deposits.

Crypto farming allows users to put their digital assets to work instead of just holding them. The more crypto volume traded, the more fees distributed to liquidity providers.

Yield farming crypto helps facilitate decentralized trading. By incentivizing users to lock up tokens in pools, exchanges can tap liquidity for swaps. This enables trading in long-tail crypto assets.

Farming can be a potentially profitable activity, though there are also potential downsides to consider. Variations in market prices and risks associated with program code may result in unexpected outcomes in some cases.

What is Uniswap

Uniswap is a decentralized crypto exchange that uses an automated market making (AMM) model to provide liquidity for crypto trades without an intermediary. Uniswap runs on the Ethereum blockchain and was one of the first DEX to gain widespread adoption.

There are currently two main versionsUniswap V2 and the newer Uniswap V3. Uniswap V3 was developed to improve on the limitations of Uniswap V2 and allows for more customized liquidity pools by incorporating adjustable price ranges. This enhances capital efficiency and reduces impermanent loss for liquidity providers.

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Users can trade on the platform by connecting their crypto wallets like MetaMask to the Uniswap app. To make deals, traders need to add liquidity to liquidity pools by depositing an equivalent amount of ETH and the ERC-20 token they want to trade.

When supplying liquidity to Uniswap exchange, users receive Uniswap coin (UNI token) as a reward. By providing crypto pairs on Uniswap's liquidity pools, farmers earn network transaction fees and benefit from the growth of UNI as the Uniswap governance token through crypto farming.

The main ways to interact with the Uniswap V3 platform include:

  • Staking your UNI tokens to participate in protocol governance and earn additional yields from yield farming.

  • Yield farming additional crypto rewards like ETH or USDC by supplying popular Uniswap pairs with high trading volume through farming crypto.

  • Receiving trading fees from crypto swaps within your designated price range pools. Every time there is an exchange between two tokens in the pool, you get a share of the commission for that transaction. The size of your share depends on how many coins you have deposited into the pool compared to the total liquidity in the pool.

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How to Add Liquidity to the Pool

You need enough coins to add to the Uniswap pool; we chose MATIC and USDT on the Polygon blockchain. The ratio of assets in the pool will depend on the price range you choose.

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Connect to the Polygon wallet. Press +New Position and choose MATIC and USDT on Polygon.

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  • Go to Set Price Range

Choose the type of pool by commission and the price range you want to use for your pool. We chose -19% | +25%. Enter the amount of liquidity you want to add to the Uniswap pool in the Deposit Amounts section. Make sure that the total amount of coins you enter matches the current exchange rate.

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  • Press Enter an amount

Confirm the transaction in your wallet. After the transaction is confirmed, you have successfully added liquidity to the MATIC/USDT liquidity pool on the Polygon blockchain.

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Price Range Efficiency Table by Uniswap

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Liquidity pools on Uniswap V3 allow users to provide their assets for exchange and receive a share of the fees collected from each transaction. This provides high liquidity for trading crypto, and also creates an opportunity for pool participants to earn money through yield farming.

Liquidity pools are the centrepiece of Uniswap and have greatly contributed to the DeFi development.

The information in this article is not a piece of financial advice or any other advice of any kind. The reader should be aware of the risks involved in trading cryptocurrencies and make their own informed decisions. SimpleSwap is not responsible for any losses incurred due to such risks. For details, please see our Terms of Service.

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