So, you decided to become a liquidity provider on Uniswap and earn some interest for your dust-gathering tokens. You are promised a proportional share of the 0.3% fee Uniswap charges its users (although in reality it's much more than that), but as with everything else in Uniswap, this is an empty promise. Unless you have tokens worth thousands of dollars, you won't be seeing your tokens ever again - and even then, you eventually pay interest to Uniswap, not the other way around.

Here is how it works.

At first, you pay entry fees

As you may have noticed, each time you have to interact with Uniswap, you have to pay a fee. Before you start blaming the miners, you should know that gas fees are calculated using this type: gas units x gas price. Now, the base fee for transferring Ether from one account to another is 21,000 gas units. For other tokens is somewhat higher. When you supply liquidity to a pool, you transfer two tokens. This means that your gas fees should be around 55,000-60,000 gas units. For some unknown reason, Uniswap has built their contracts to convert Ether to Wrapped Ether (WETH), so there is one more transaction added - the conversion from ETH to WETH - and your gas fees are climbing around 85,000 to 90,000 gas units. And eventually, Uniswap adds its own cut of gas, through their contract - with a base of some 210,000 gas units, as you can see in this transaction.

Now, even with a price as low as 10 gwei, Uniswap's cut alone in each liquidity provision transaction would be at least 0.0021 ETH or at about $8 at current ETH price. Unfortunately, gas price nowadays starts at around 80 gwei, or 8 times the price in the example. With a minimum upfront cost of about $100 (of which some $65 go to Uniswap), it doesn't make sense for anyone holding tokens worth over 2 ETH, to provide liquidity to Uniswap - and as you will see later, even if you decide to provide liquidity of just 2 ETH, you will be extremely lucky to even earn a tiny fraction of an ETH within a year.

Then, you have to compete against Uniswap

Under Uniswap rules, any fees earned in each liquidity pool are proportionally shared among LPs, based on how much liquidity each LP has provided in the pool. Unfortunately, Uniswap's rules do not prohibit Uniswap itself to be a LP - often counting for up to 95% of the liquidity, even in pools that liquidity provided by LPs unrelated to Uniswap is more than enough to cover any transactional demand. Worse than that, is the fact that those Uniswap-related accounts are not subject to the insane entry fees, everyone else is facing. Decentralization anyone?

And finally, you pay exit fees

What happens when you decide to provide liquidity to a pool, happens again when you decide to cash out any earnings you have accumulated. Although you are offered the option to save some gas by receiving WETH rather than ETH, Uniswap will always get their 210,000 gas minimum cut.

With a minimum cost in transaction fees of around 0.05 ETH (with gas price at around 82 gwei), not only you won't be earning anything on the tokens you provided in a liquidity pool, but in reality it is you who is paying Unswap, not  the other way. And if you had the bad idea to provide liquidity worth under 0.06 ETH* (and that, if you are very lucky), Uniswap's fees are eating up not only any earnings you may have achieved, but also part - if not all - the value of the tokens you provided to them.

* This is the amount Uniswap is charging you for the entry and exit transactions at 82 gwei (equals at around $200 at current ETH price). But this price point is very rare, since most of the time, gas price is at least double than that.