The basics of earning yield through Uniswap, impermanent loss & more!
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To me, Uniswap is the OG of the AMM space. They are the unicorn at the end of the rainbow with a pot of gold and a leprechaun.
Now we have Mooniswap, 1inch, SushiSwap, Zuniswap (just saw this one, srsly man?!?!) and other clones.
They’re trying to gain market share.
And rightfully so, in the spirit of decentralization it is righteous that we have choices of AMMs to use.
But, we are big Uniswap fanboiz.
For many reasons, but mostly because they truly offer an easy ‘one-click’ experience of trading & have the most volume of any AMM, giving the users the highest fee accrual.
Topping out at #3 on TVL (according to DeFi Pulse), Uniswap is here to stay.
Today we’ll show you how to utilize the platform to generate passive income while keeping asset exposure!
Master It Monday: Becoming a Uniswap Liquidity Provider (LP)
So you wanna make some chad gains, you degen?!?!
Lol. Let’s walk through the process of becoming a liquidity provider on Uniswap.
Step 2: Click on ‘Pool’ and choose the assets which you want to provide, for this example we will do ETH-DAI pool. We will need to provide the same USD amount of both assets to the pool – so make sure you have the same amount in your wallet.
Step 3: Press ‘Approve’ (not shown here) and accept the first MetaMask transaction which pops up (which is to approve the assets), then when that finishes approving, press ‘Supply’ and once that transaction approves, thats it! You will see your liquidity appear.
Step 4: Check your ROI on Pools.Fyi! It shows you the average returns over a 7-90 day span, and it includes impermanent loss.
So, what is impermanent loss?
Impermanent loss is the difference in returns you see by investing in a liquidity pool vs. just holding the tokens. The loss is incurred when there is a ratio change in your assets, causing a rebalance of your allocations.
Basically, if the value of your assets change (in the above example, Ethereum) then the ratio of your pool also changes. In this example, I entered the ETH-DAI pool at $339 per ETH & $1.02 per DAi. If ETH goes up to $400, now all of sudden I have more USD value in ETH than DAI. So, the rebalance will take affect where I will be allocated more DAI and more or less have ETH ‘taken’ from me. In an attempt to keep the ratio 50:50, the AMM rebalances your assets for you.
Keep this in mind when providing liquidity to Uniswap pools, because in very volatile times you might be better off just HODL’ing, rather than providing liquidity!
This video below is from DeFi Weekly, a great YouTube channel. Check it out for a detailed explanation!
⚠️DISCLAIMER: Investing into cryptocurrency and DeFi platforms comes with inherent risk including technical risk, human error, platform failure and more. We are strictly an educational content platform, nothing we offer is financial advice. Please refer to our blog for more on mitigating your downside when using these protocols!
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