Liquidity on Uniswap: income and the catches
Lesson 23 of 58 in the course “Crypto”. Free, with animations and a quiz.
The range: where your money works
On Uniswap v3 and v4 you choose the price range where your liquidity works yourself. For example, ETH from 2,800 to 3,400 USDC. While the price is inside, your share takes part in swaps and earns fees. If the price drops below, you are left holding only ETH; above, only USDC, and no fees come in. A narrow range earns more fees per dollar, but the price leaves it more often. A wide one is calmer, but the income is smaller.
How much impermanent loss eats
The further the price moves from your entry, the bigger the loss compared with simply holding. On a full range: ETH up 1.5× costs 2%, 3× costs 13.4%, 5× costs 25.5%. A drop works the same way. A narrow range makes this stronger. The loss is called impermanent because it disappears if the price comes back. But if you exit the pool at a different price, it becomes very permanent.
Who actually makes money
In 2021 Topaz Blue and Bancor studied Uniswap v3 positions and found that about half of liquidity providers earned less than if they had simply held the coins. Fees did not cover impermanent loss. The most consistent earners are pros with bots that keep shifting the range. For an ordinary person, LPing is not “passive income” but active work with risk.
How to go in wisely
If you want to try, start with a stable pair such as USDC/USDT on the 0.01% fee tier: the prices barely diverge, so there is almost no impermanent loss, though the income is small too. For ETH/USDC choose a wide range. The position arrives as an NFT: do not sell or give it away, because it is your share of the pool. Once a week compare the fees you have collected with what the coins would be worth if you had simply held them.
Check yourself
- ETH’s price has moved above your Uniswap v3 range. What happens to the position?
Correct answer: It is all in USDC and earns no fees. As the price rose, the pool sold your ETH. Above the range you hold only USDC and earn nothing until the price returns. - Which pair has the least impermanent loss?
Correct answer: USDC/USDT. The loss grows when the coins’ prices diverge. Two dollar stablecoins barely diverge. - You entered a pool when ETH was 3,000 and exited at 3,000. What about impermanent loss?
Correct answer: There is none: the price came back, and you keep the fees. The loss is impermanent: at the same exit price there is none. It becomes real if you exit at a different price.
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