How profitable is providing liquidity on Uniswap really?

By TMod_Marco | TMod_Marco | 21 Aug 2020


For those of you who don’t know Uniswap, Uniswap is the most popular and used decentralized exchange at this moment. It’s clear we’re in some kind of ‘altcoin season’ at the moment, and ERC-20 tokens have been booming. With that, decentralized exchanges became more popular for a few reasons:

  • Centralized exchanges are less secure, and on decentralized exchanges users have control over their funds at all times.
  • Decentralized exchanges are private. KYC and AML checks do not apply.
  • Decentralized exchanges can be accessed by users world-wide, whereas centralized exchanges restrict users from certain countries (e.g. US users).
  • Uniswap is probably the most liquid exchange around with over $250M in liquidity provided at the moment. 

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Another very interesting benefit of Uniswap is their fee-sharing model. Users pay a 0.3% transaction fee on Uniswap swaps. These transaction fees are directly shared between all liquidity providers of this pool (e.g. the ETH-AMPL pool). This can be very lucrative for pairs that have relatively low liquidity provided versus high volume.

Liquidity providing is mainly interesting for those who are already holding a token and are bullish on it. To provide liquidity, you’ll need to pool the same value in ETH as the other pair - so that liquidity is always provided in a balanced way. I’m not going to cover how to provide liquidity on Uniswap in this post - I might do so in another post - but for now, feel free to check out this great tutorial.

Real-Time Example

A few days ago, I decided to try out how profitable providing liquidity really can be. On Thursday, August 18, I decided to lock in 2.4866 ETH and 4,164 OM for a total value of $2,126. Today, three days later, the value of this provided liquidity is $3,027. I received $350.79 in fees, meaning I received a $550.21 price return (25.8%) and a 16.5% Uniswap ROI within three days! 

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I have to add to that that OM was newly listed on Uniswap and is very popular among the crypto community. Therefore, it’s volume and price skyrocketed. Providing liquidity to newly popular listed projects might be the most profitable time to provide liquidity - however, this can also be riskier. Overall, there’s plenty of long-term projects it’s worth providing liquidity for.

UniswapROI is a great website you can use to view the current yields pools provide on Uniswap.

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The risks involved

This seems really good, doesn’t it? And, it is good! However, it’s great in a bullish market and maybe not so great in a bearish market - unless you’re willing to hold a token for long-term and have time to ‘survive’ these markets.

As said, when providing liquidity you’ll have to provide both ETH and the token you’re looking to provide liquidity for. This basically means you are ‘doubling your bags’ and are subject to double the price movements. One option to reduce risk could be by selling 50% of your position and using this 50% in ETH to provide liquidity for the same bag you held before.

On top of that, the fees you receive do offset some of the losses you’d make during a bearish market.

I hope this post was helpful for you. If so, then please consider following me and I’m looking forward to sharing my next post with you soon. This post is for informative purposes only, I’m not a financial advisor. I have not been paid for this post, this post is out of personal interest. 

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TMod_Marco
TMod_Marco

@TMod_Marco on Twitter < Follow me. Dutch blockchain, marketing & strategy consultant. Head of Community at Presearch.org.


TMod_Marco
TMod_Marco

https://www.quora.com/profile/Marco-Van-den-Heuvel

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