Uniswap V3 For The Little Guy

Today we're going to talk about Uniswap v3 for the little guy. There's been a lot of talk about Uniswap v3 and a few people have bit left out by the announcement. So here i'm going to tell you how you can benefit from it even if you're not a big whale. If you enjoy this video please subscribe to my channel and give it a thumb up.

So let's say you're a liquidity provider, the current price of ethereum is 2500 DAI and you want to provide one ethereum and 2500 DAI. So you deposit this into the ethereum DAI pair on Uniswap v2 and what it does is: it will spread your liquidity from zero to infinity on the ethereum/DAI pair price spectrum, dividing it into small brackets and it will distribute your liquidity in each of these small brackets.

What happens is that when there is a small trade, it will be easy to find enough liquidity in one single bracket. So the trader will be able to exchange their currency for the current price or something very close to the current price. If there is a big trade then it will be spread among various brackets and therefore the trader will end up paying a premium which is called "slippage".

So that's bad for the trader but it's also bad for the small liquidity provider because if it's a small trade, a small proportion of one single bracket will be used and if it's a bigger trade many more brackets will be used but it will still be a tiny proportion of their liquidity in each bracket and there will still be a lot of price ranges that will be untouched and won't be generating any fees for the liquidity provider.

Let's take the same use case where the current price is still 2500 DAI and the user is depositing one ethereum and 2500 DAI into Uniswap v3. The difference now is that the user can decide in which price range the liquidity will be used. So in this case the user is going to pick the range from 2k to 3k DAI and when the price rises above that or below that range, the liquidity will not be used but every time the current price will be inside the price range then liquidity will be used every single time, generating way more fees than when using Uniswap v2. And the smaller the the price range, the more fees will be generated. The Uniswap team has said that if the price range is as small as 0.10% then you could be making up to 6 000 times more fees than with Uniswap v2.

Another advantage is that small trades will still be able to happen at current price but also bigger trades because it is expected that popular price ranges that are around the current price will receive a lot of liquidity because everyone will be wanting to get 100% fees and so when big trades happen, because there will be so much liquidity inside the current price bracket, there won't be much slippage because the the current price will be inside such a big bracket with tons of liquidity.

Uniswap won't have to use liquidity from other price ranges so bigger trades will benefit from this and liquidity providers, even small ones, will benefit from it because  they will get way more fees on every single trade as long as the trade is inside their price range.

So that's cool but if you're like many people you may be asking yourself well what if the price of ethereum rises above my price range, if it goes, in this example, above 3 000 DAI. Will i lose all my ethereum? and the answer is yes but you can get it back if the value of ethereum drops below three thousand DAI again.

The thing is what you need to take into account is that when it comes to automatic market makers such as Uniswap,  impermanent loss is the name of the game. You cannot make without it. If one of your assets goes up in price then you will get less of it and if it goes down you'll get more.

So knowing that, you should realize that impermanent loss is part of what you're being paid for: for the risk of losing an asset that is going to go up in price you get some fees every time this asset gets traded.

And the thing is, Uniswap v3 embraces impermanent loss and instead of trying to pretend it doesn't exist, it allows you to maximize your gains on the fees generated by the fact that people pay you for impermanent loss.

One of the ways to maximize your gains with it is to use Uniswap v3 as a very efficient and lucrative order book. So say you want to sell your ethereum at 3000 DAI, then what you do is you deposit your ethereum and DAI in the ethereum/DAI pair and you just wait for the ethereum price to rise  above 3 000 DAI and then your ethereum will be sold for 3 000 DAI.

So once the price of ethereum reaches 3000 DAI, you will be able to withdraw your liquidity. And what will you get? Well, you'll be getting your 2500 DAI back and you'll also be getting 3 000 DAI from your ethereum that was completely sold and in addition to this you will get all the fees you made along the way. So let's say that ethereum traded between 2000 and 3000 DAI for three months. You'd been making a huge amount of fees during three months so if the APY was at 30 or 40%, you would have been making tons of fees during those three months and at the end, you'd be getting not only your 3000 DAI but also all the fees you made out of the way.

It's a pretty cool way to sell your ethereum. So that's your first use case: use Uniswap v3 as an orderbook on steroids. Now you may be one of these people with diamond hands who would never sell their ethereum and so you wouldn't be interested in this use case. There are a few ways you could alleviate this.

First you could set a more conservative price range to concentrate your liquidity into, such as from 2000 to 4000 DAI, if the price gets too high you can always remove liquidity and set it to a different price range. Finally you could also set several price ranges and take advantage of each one.

Now you may be thinking moving your liquidity between price ranges would be extremely expensive and would also require you to monitor price changes all day long to the point where Uniswap would be a full-time job. Now, there are still ways to make passive income with Uniswap v3 just like you used to with Uniswap v2. First you could of course still provide a range from zero to infinity just like if you were using v2 and so you could just sit back and relax why while your fees accumulate and you would still be making more fees than with Uniswap v2.

Second you can also expect the community to build lots of services around Uniswap v3 that will allow you to just deposit your liquidity in a vault and then they will take care of all the busy work for you. They will invest it in dynamic price ranges and try to optimize yield for you while splitting fees between all participants. This way you won't be affected by gas price even if you are not a whale and only have a small amount of liquidity to provide.

Finally, even if you want to use unit Uniswap v3 solo, as someone who doesn't have a lot of liquidity you could still take advantage of layer 2. As you know Uniswap v3 will be launching on optimism layer 2, gas will be extremely cheap so you would be able to play around with price ranges and whatnot without losing everything on gas price.

To recap, these are the reasons i believe Uniswap v3 will be friendly to the little guy with little liquidity.

First, it will provide a fancy order book to sell your currencies by getting lots of fees along the way.

Then even if you pick a very conservative range, you will still be making more fees than with v2. There will be lots of services that will help you optimize the use of your liquidity across moving price ranges without getting hurt by fees and finally, thanks to layer 2 you will be able to benefit from very low fees to be able to play solo with your  Uniswap v3 liquidity and still make a lot of fees.

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