Uni V3 liquidity - be careful of price range you set

Uni V3 liquidity - be careful of price range you set

By Smendel | Allaboutcoins | 1 Jun 2021


If you were ever a defi liquidity provider, you will know how impermanent loss can affect your total profit. 

I participated some mining in different chains, eventually, it was heart broken to find out that the impermanent loss had always surpassed the income fee, I had to cut the baits at a loss. Don't be deceived by the high APY you see. Think it twice! Unless the coin price works to your favor, you will suffer more bigger loss from impermanent loss than income fee. 

When Uni upgraded to V3, I was glad to find out that V3 seems to have resolved the problem with impermanent loss, however, it creates another problem which is illiquidity of your money. If the price range you set are out of range, your LP will be automatically taken out of the liquidity and become idle. You won't make fees out of that. 

Even though the impermanent loss seems to be avoided with Uni V3, it doesn't mean that you won't suffer from loss of potential growth unless you remove your liquidity. Well, we all know how expense gap fee is if you add or remove a liquidity... V3 gives your LP in a form of NFT, do understand that this "NFT" IS to your LP. Be aware not to sell your "NFT" for a price lower than your LP. We all heard of the story of some dude sold his NFT for 1 ETH when he actually held nearly 9 ETH in it! When the NFT exchanged hands, so was the money(LP)! 

Be careful when you try to set up the price range for your LP. You need to understand that the min and max price is the price when all the money you put in will be converted into one single coin in your LP. eg. If you use ETH-UNI as your LP, min price will lead to all money been converted into ETH and max means 100% UNI. I made a huge mistake myself when I set up the price range, leading to all the ETH being converted to UNI, and missed out significant price increase of ETH few weeks ago and got hit by price drop of UNI... and the fee I made from providing the liquidity was only $0.61! 

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Gladly I didn't put in a lot money! However, I am still hesitant to remove the liquidity even though the LP is sitting aside without making any fee for me as it's way out of range, I am not sure what will happen to the NFT when you withdraw the liquidity? I guess most likely the NFT will be burned since the NFT in a sense is your LP, when LP doesn't exist, so does the NFT. Anyone know how this works? 

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