How to understand and use Uniswap V3’s LP NFT?

The meaning and value of LP NFT in V3

Although Uniswap V3 has been live for almost a week, Rhythm Blockbeats found that many users still do not understand the value and significance of NFT in V3. So much so that a user recently took to Twitter and sold his LP NFT position worth about $127,000 for 1 ETH.

How to understand and use Uniswap V3's LP NFT?

In order to help you better understand the value and application logic of LP NFT and avoid similar losses, we hope that this article will help answer any doubts you may have in using it.

What is NFT

Simply put, NFT is short for Non-Homogenized Token, specifically used to represent assets that are unique and difficult to divide. However, due to the recent sharp increase in the price of NFT as the main storage carrier of collections and artwork, and caused a significant wealth effect, resulting in many users will habitually equate NFT with collectibles.

In fact, in addition to collectibles, there are many assets in reality with unique, indivisible and other attributes. Such as game props, skin, and various non-standardized instruments in the financial market, and so on. For example, if you buy a large deposit slip at a bank counter, the amount, date, interest rate, depositor’s name and other specific attributes marked on this deposit slip will vary from person to person. Also, the bank will assign a unique number to each deposit slip. Financial instruments with unique attributes such as these are well suited to be represented by tokens using the NFT standard.

The meaning and value of LP NFT in V3

For many ordinary users, the NFT in V3 seems to be a commemorative card that is automatically given to you after Uniswap V3 provides liquidity, but this is an extremely misconception.

Rhythm Blockbeats would like to remind you that the LP NFT in V3 is not a collector’s item that you give to your users after you provide liquidity to make a market, this NFT represents your ownership of your deposited funds, and any user who receives this NFT has the right to redeem the corresponding funds. If you sell or transfer this NFT, then your right to redeem your previously deposited funds will also be transferred.

How to generate LP NFTs

Users do not need to do anything specific to “generate” LP NFTs, as long as they follow the instructions to successfully provide liquidity in V3 (see this article: “Uniswap V3 First Hands On Tutorial: A New Market Making Experience”), the V3 version of the smart contract will automatically mint an NFT that represents your funded position and send it to your address. Just as LP Token is automatically generated and sent to you after you successfully provide liquidity in V2.

What the symbols on the NFT interface mean

How to understand and use Uniswap V3's LP NFT?
  1. Name of the trading pair
  2. Fee rates for the pools

Each pair is free to create at least three pools in V3, each pool corresponds to a different trading rate, here is the fee rate of the pool for the liquidity you provide.

  1. The degree of aggregation of LP-provided funds on the original constant product curve

The shape of this curve indicates the degree of aggregation of funds. The greater the curvature of the curve, the less aggregated the LP’s funding is and the wider the price range it covers.

Also, this curve can indicate whether the liquidity you are providing, is currently in the effective range and is earning you a return. If both ends of the curve are a dot, it means that the current price of the token is in the range of the liquidity you are providing. If the price is out of your market making range, the curve will take the shape of a ray with a vertex at one end and an infinite extension at the other, indicating that the liquidity you deposited is in an idle state.

  1. NFT numbering

At the moment of creation, each NFT is sequentially assigned a unique number, which is the ID we see in the chart, and the earlier it is created, the smaller the value of the ID will be. Also, the maximum value of the current ID number makes it easy to check the number of NFTs that have been created so far.

We can check the address of NFT generation through the Blockchain Browser.

How to understand and use Uniswap V3's LP NFT?

As you can see, up to now, a total of 12,293 LP NFTs have been generated across the network, and the number of addresses holding this NFT is 7,896.

  1. Price range of fund allocation
    Tick is a new concept added in V3. In V3, each tick number represents a separate price point on a complete price curve.
  2. Position of the curve on the complete curve

This is a thumbnail diagram indicating the position of the liquidity you provide within the complete price curve.

7, 8. The address of the token corresponding to the trading pair

If you click on the link for the card, you can see two strings of codes that are rotating around the card. These two seemingly irregular strings of code represent the contract addresses of two different tokens in the pool. Since it is extremely cheap to create ERC20 tokens on the chain and you can name them whatever you want, the contract addresses are the only way to help you confirm that the tokens you are buying are real tokens.

Therefore, if you want to get liquidity from the V3 pool by direct purchase, please make sure to verify that the contract addresses of the tokens are genuine before you buy them to avoid buying a liquidity position made up of fake coins.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/how-to-understand-and-use-uniswap-v3s-lp-nft/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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