Uniswap V3 was officially launched on May 6th. Since the user interface and market making logic of the new version have changed a lot compared to V2, many users have reported that the complexity of providing liquidity in V3 is much higher. In order to better help users understand the interaction logic of the new version, this article will take you step by step through the experience and provide users with a first hands-on tutorial.
How to trade in V3
The first thing that pops up when you open the official website address is the familiar exchange interface.
As you can see, for users who just want to execute a trade, the new user interface is almost unchanged from the previous version in terms of front-end. However, as you can see by the arrow in the bottom left corner, the pools used behind the trades have been switched to the new V3 version by default.
Of course, since many of the V3 pools have just been established, some pairs do not yet offer the same price and slippage advantages as the V2 version. So when this happens, the interface will automatically provide a switch button at the bottom left, so that the user can switch to the V2 version of the pool with one click to get the best trading price.
How to provide liquidity in V3
(1) How to choose a pool with different trading rates
Let’s start with the user interface. Click the Pool button at the top of the interface to switch to the pools screen.
The top left is a link to the official introduction document, which is not overly described here.
On the right side, you can view details of the current top 200 pools and browse timely data information for the leading pairs.
Tap on it and enter the following screen.
The leftmost part of the interface shows the specific pairs of the pool. After the name of the pair, the transaction fee rate corresponding to this pool is displayed. Note here that since three different rates of 0.05%, 0.3% and 1% are provided in the V3 version, resulting in three separate pools with different rates being created in V3 for the same pair.
So, how should users choose different pools to provide liquidity?
As an example, as you can see in the chart below, the USDC/USDT pair has been created with at least two pools in V3, one with a fee rate of 0.05% and the other with 1%. As you can see, since USDC/USDT is a stablecoin pair, LPs basically do not need to take much risk of impermanent losses, leading to the fact that trading users will prefer to trade in pools with low fee rates, while LPs will prefer to provide liquidity in pools with a higher concentration of traders in order to earn more fees.
As a result, we see that pools with a 0.05% rate are far better than pools with a 1% rate, both in terms of TVL and 24-hour trading volume. We would like to remind our users that when providing liquidity, it is important to choose a pool with a higher TVL and trading volume, so that the liquidity they provide does not go unused in an inactive pool and they miss the opportunity to make a profit.
So, how should you choose the rates for different trading pairs to effectively avoid having your money go unused?
Let’s take a look at this timely chart provided by TVL.
As you can see, for pairs where both sides are stable coins, the top of the list is undoubtedly the pool with the lowest rate of 0.05%. As long as the pair involves a coin with a high price volatility, the top ranking is in the middle rate bracket of 0.3% handling fee. Thus, for volatile pairs, LPs need to earn a higher fee to compensate for the unpredictable losses they suffer in market making. Stable currency pairs, on the other hand, are relatively stable in price and LPs suffer less erratic losses, resulting in a competitive advantage for pairs with lower rates. (The top rate tier of 1% is mainly used for certain new coins or cryptocurrencies, etc., which require a higher fee rate for the market-making LPs to compensate for their impermanent losses from market-making due to extreme price volatility.)
(2) How to add liquidity
Go back to the Pool screen and click the New Position button on the top right to enter the Add Liquidity screen.
Step 1: Select the pair you want to add liquidity to at the top.
Here we select the pool for adding USDC/ETH pairs.
Step 2: Choose the rate of the pool
Here, we follow the tips below, for non-stable currency trading pairs, it is usually enough to choose the middle bracket with a rate of 0.3% to add liquidity to the pool.
Step 3: Select the price range for market making
Here we should note that the V3 version of the system does not support LPs to enter arbitrary prices when selecting a price range.
The V3 version provides liquidity aggregation, which leads to a significant increase in the amount of calculations compared to the V2 version. Therefore, in order to minimize the calculation process in trading and reduce the amount of gas fees traders need to pay, the V3 version artificially slices the originally available full price range into different price points.
For example, for a 0.3% rate pool, the minimum price change is 0.6% of the price point. For example, after the price point of 3401.6 USD, it would be 3422.1 USD (3401.6*(1+0.6%)). Pools with different rates will correspond to different minimum variation percentages. For example, for a 0.05% pool, the minimum variation in price is 0.1%, while for a 1% pool, the minimum variation in price is 2%.
But here users don’t need to worry, we just need to enter the price we want in it and the system will automatically adjust the price you entered to the nearest available price point for you. If you’re not satisfied, just tap the pink button below to fine-tune it. Here we have chosen to enter 3165.3 USDC vs. 3590.3 USDC as our market making range.
Step 4: Choose the amount to deposit for the market making coin
Note that this is the most confusing part, because in Uniswap V3, the ratio of the market value of the two tokens that need to be provided for LP market making is no longer a simple 50/50 ratio. So, what will determine how much USDC and how much ETH will be provided by the LP market making?
Here, we have three important parameters to focus on.
- the lower limit of the market making interval (Min Price)
- the upper limit of the billing range (Max Price)
- the current market price of the pair (Current Price)
The final ratio of ETH to USDC to be offered by the LP is determined entirely by these three parameters. To put it in professional terms, the ratio of ETH to USDC that the LP will eventually offer is a function of three variables: the lower limit of the bidding interval, the upper limit of the bidding interval, and the spot price. The spot price is not adjustable by the user as it is completely determined by the market. So for LPs, the only way to influence the final ratio of coins offered is by adjusting the range of the price range.
To demonstrate this more visually, we illustrate this experimentally.
The current ETH market price is 3490 USDC, the lower limit of the price range is 3165.3 USDC and the upper limit is 3590.3 USDC. At this point, if we have 1 ETH in our hands ready to make a market, how much USDC should we offer at the same time?
All we need to do is enter 1 in the number of ETH deposits below, and the system will automatically calculate the number of USDCs we need to provide. As you can see, the market value of the two coins is $3,491 and $11,252, which is no longer the 1:1 ratio of the original V2 version.
Of course, we can also enter the amount of USDC and let the system automatically calculate the amount of ETH. As you can see, although the quantity of both currencies has changed, the relative ratio has not changed. So, once we have determined the three key parameters mentioned before: the lower limit of the market making interval, the upper limit of the market making interval, and the spot price. Then the relative ratio of ETH to USDC has been fixed. If you want to adjust this ratio, you can only do so by adjusting the range of the market making price.
(3) Special case: making a market in a price range other than the spot price
In the example given above, we have chosen a price range that is exactly on either side of the spot price. But what happens if LP chooses a price range for market making that is completely above the current spot price?
We set the lower limit of the market making price range to 4023.8USDC and the upper limit to 5024USDC, while the spot price remains at 3490USDC.
At this point, we see a small yellow line below the spot price in the chart above, indicating that users may not be able to earn commission income for making a market in this range. But it doesn’t matter, LPs can still provide liquidity in this price range, and maybe tomorrow ETH will rise to over $4,000.
It is important to note that in this case, the market making funds we provide no longer consist of two currencies.
See the screenshot below, where we still enter the 1 ETH we want to offer, and you can see that where the USDC amount was automatically returned, it has been changed to a small lock. At this point, users should not think that they did something wrong, and it is not because you did not authorize the trade pair. Here it is simply because the market making price range is completely higher than the spot price, resulting in the user only needing to provide a single currency to complete the market making.
Yes, when the lower limit of the market making price range is already completely above the spot market price, LPs only need to provide a single currency, ETH, to make a market. And when the price range of market making is completely below the spot market price, LPs also only need to provide a single USDC to complete the market making.
See the chart below for details. At this point, as long as you have enough USDC tokens in your wallet, you can enter as many USDCs as you want to make a market, without having to care about the amount of ETH.
How to Build Range Orders
Range Order is a new feature introduced in the V3 release. The new range order simulates to some extent the limit order functionality of the traditional order book trading platform. Suppose a user has 10 ETH in his hands and plans to sell them for USDC take profit when the price rises to $4000, he should do the following.
- choose to provide liquidity in the ETH/USDC pool at a rate of 0.3% of the maximum fund size.
2.Keep the upper and lower limits of the market-making price range as close as possible to 4000USDC.
(Since the nearest available price point above 3999.8 is 4023.8 (3999.8*1.006=4023.8), 3999.8-4023.8 is chosen here as the market making price range)
- Enter the amount of deposit in the Deposit Amounts section below: 10ETH.
- Click the button at the bottom to execute the transaction
(Since Rhythm BlockBeats does not have this much ETH in its account, I can’t show you a screenshot here.
If the user successfully completes the above steps, then when the price of ETH rises to $3999.8, the 10 ETH positions he deposited will be converted to USDC, and when the price rises above $4023.8, then all of his positions will be converted to USDC. If the user withdraws the liquidity immediately, then a take profit sell order is automatically executed through Uniswap V3 at a price approximately equal to $4011.78.
For a detailed explanation of range orders, see Rhythm’s previous article: “Are Range Orders Limit Orders? | Uniswap V3 New Feature Analysis Series II”.
LP Token NFT
To help users better understand the new NFT Token format. Rhythm tries to provide some liquidity to the ETH/USDC pool with a Gas of almost 100 knots. Since there are no more USDC tokens in the account, we chose a market making range above the spot market price, with a lower limit of 4000 USDC and an upper limit of 4994 USDC. at this point, we can make a market in a single ETH currency.
The NFT display is also very cool, with the name of the pair shown at the top of the interface: ETH/USDC, and the pool rate below: 0.3%. the ID number shown in the bottom left corner of the NFT card is 3045, which Rhythm guesses is a ranking of users by how long they have been providing liquidity. It is said that the first 100 users who provide liquidity to each new pool are likely to receive a rare symbol of a small sun in the bottom right corner of the card, which Rhythm has not been able to experience here.
The top right of the interface shows the number of tokens included in this part of the market making position, as you can see the number of USDC is 0 and the position is currently composed entirely of ETH. The top of the screen indicates in orange that the current ETH spot price is not within the market making price range selected by Rhythm. The amount of unclaimed fees shown at the bottom right is also 0.
But don’t worry, as long as the price of ETH continues to rise and exceeds $4,000, Rhythm’s NFT position will start earning fees.
How to view pool data in V3
Let’s take USDC/ETH (0.3% handling fee) pair as an example. As you can see, the interface shows the latest trading volume, lock data and recent trading records of this pool in detail, which are not much different from the V2 version, so we will not explain them in detail here. What users need to pay attention to is the Liquidity section as indicated by the arrow in the upper right corner of the interface.
We click on the link to see the liquidity distribution display page below.
This page shows the liquidity distribution of the pool, in different price ranges. We move our mouse over the highest point of the curve at the arrow. As you can see, liquidity is currently most concentrated at the price point of 3463.3623 USDC/ETH. This is also highly correlated with the day’s ETH price, and it can be seen that LP provides the most liquidity around the day’s spot price, which also means that traders can enjoy lower slippage by trading around this price point.
This is our first hands-on tutorial for Uniswap V3
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/uniswap-v3-first-hands-on-tutorial-a-new-market-making-experience/
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