How to Become a Liquidity Provider on Uniswap
A Step-by-Step Guide to Using Liquidity on the DEX
By: Arya Ghobadi •Beginners
Uniswap is a decentralized financial exchange, or DEX, which allows anyone to take part in the financial transactions of Ethereum-based tokens without a central body or intermediary.
It’s committed to giving users permissionless access to financial services with security and immutability and without the fear of discrimination or counterparty risk.
Because it’s built on the Ethereum blockchain and uses smart contracts, Uniswap replaces traditional centralized market tools like exchange listings and limit-order books with automated and permissionless liquidity pools executed purely by algorithms.
A liquidity pool is a crowdsourced pool of cryptocurrencies or tokens locked in a smart contract that is used to facilitate trades between the assets on a decentralized exchange (DEX).Read more about UniSwap here.
Here’s a tutorial on how to become a liquidity provider on UniSwap:
Go to the UniSwap official website and click on Launch App and it brings you to app.uniswap.org:
First of all, you need to connect your wallet to UniSwap, in this tutorial, we use MetaMask as an example. Click on Connect Wallet:
A list of wallets should pop up and you can select your desired wallet. First, we show you how to connect MetaMask which is on the wallets list to UniSwap. So select MetaMask:
Choose your desired account and click on Next:
Great! Now, your MetaMask is connected to UniSwap and you should be able to see your balance and your wallet address at the top of the page.
To become a liquidity provider, you need to click on Pool:
Select + New Position:
Here you should select a pair, in this tutorial we use ETH, USDT. Then select a pool type based on your preferred liquidity provider fee. Here as ETH, USDT is a common pool we select the 0.3% fee:
- 0.05% fee tier: Best for stable pairs
The 0.05% fee tier is best suited for token pairs that trade at a pretty fixed or highly correlated rate, such as stablecoin-stablecoin token pairs (example. USDT-USDC). Liquidity providers take on minimal price risk in these pools, and traders expect to pay minimal fees.
- 0.3% fee tier: Best for most pairs
The 0.3% fee tier is ideally used for less correlated token pairs such as the ETH-DAI token pair, which are subject to significant price movements both to the upside and downside. This higher fee is more likely to compensate Liquidity providers for the greater price risk that they take on relative to stablecoin Liquidity providers.
- 1.0% fee tier: Best for exotic pairs
The 1.00% fee tier is designed for exotic assets, where LPs take on extreme price risk. Relevant assets are those that are particularly subject to monotonic price movements.
Now you should enter a price range. You should consider the degree to which you think prices will move over the course of your position’s lifetime and you should know that if the price goes outside your range you will not earn earn trading fees untill it returns to your chosen range.
Enter the value in one of the Deposit Amounts boxes and the another box will be filled automatically and then click on Approve USDT:
Confirm it on MetaMask:
Cllick on Preview and review the details:
After reviewing the details, click on Add and confirm the transaction on MetaMask:
Great! Your assets now provide liquidity for UniSwap traders and you’re earning fees and you will receive the LP tokens in your wallet.
How to Redeem Liquidity on UniSwap
Go to the Pool section and select the desired pair from Pools Overview part.
Click on Remove liquidity:
Choose the amount of the provided liquidity that you want to withdraw and select Remove:
Confirm the transaction on your MetaMask:
There you go! This was our tutorial on how to become a liquidity provider on UniSwap and how to redeem liquidity on UniSwap! You can also check out this video.
If you want to learn how to buy crypto on UniSwap check out this tutorial!
This series article is intended for general guidance and information purposes only for beginners participating in cryptocurrencies and DeFi. The contents of this article are not to be construed as legal, business, investment, or tax advice. You should consult with your advisors for all legal, business, investment, and tax implications and advice. The Defiant is not responsible for any lost funds. Please use your best judgment and practice due diligence before interacting with smart contracts.