Opportunities & Risks

Introduction

For inspiration, we will discuss a few strategies that can be utilized on the Uniswap v3 platform. Each of these strategies will be discussed in terms of risk and time, as well as their pros and cons. Moreover, we will reveal how similar protocols performed, and whether they were worth investing in.

Types of Strategies for Investing into a Protocol and Risks

Providing liquidity  –  LP (Liquidity Pool)

When providing liquidity on the Uniswap v3 platform, keep in mind that the more concentrated the position range, the greater the swap fee you will receive. However, this approach does have some disadvantages, in that if the range is too narrow and the asset price breaks through it, you will not be able to earn fees until the price of the asset returns to the range. As the position becomes more narrow, the impermanent loss (IL) also increases.

We recommend following the fee tiers that correspond to the volatility of the LP pair. Let's look at some examples.

0.01 % and 0.05 % – These fee tiers and their ranges are considered to be safe for stablecoin pairs. Most of the time, I choose 0.05 %, as we have seen several times that stablecoins have been out of their pegged values for some time. This strategy provides the highest returns over the medium and long term.

0.3 % – It is suitable for positions such as $USDC/$wETH or those that are price correlated, such as $wBTC/$wETH. Following the selection of the LP pair, you are required to select the range. Here is an example of an LP $wBTC/$wETH, where the current price is 13 5736 $wETH per $wBTC. Our liquidity range was set between 10 023 and 16 994 $wETH per 1 $wBTC. Since these two assets correlate sufficiently, the price should not easily leave the expected range. This strategy provides the highest returns over the medium and long term.

Uniswap

1 % – It is generally regarded as the best fee tier for exotic pairs that exhibit high volatility. A large majority of LP on the Uniswap platform would not use it since providing LP with highly volatile assets can be fine as short-term speculation, but is highly risky over the long run, especially in a bear market.

Tools that are useful for making decisions and creating LP include:

If you would like to learn more about how Uniswap v3 works, read our ‘Uniswap v3: Protocol’ article before creating an LP.

History of Similar Protocols

Other projects similar to Uniswap include Curve, PancakeSwap, and Balancer. They have all been operating for several years and are doing very well. They provide a decentralized interface through which you can swap tokens without the requirement for KYC. It is also possible to earn interest in cryptocurrencies on all of these platforms by providing liquidity. Each of them is sufficiently secure if you apply the proper strategy, and each of these protocols have utilized top-notch auditing companies to help take care of the security of their code bases. They have introduced the Bug Bounty program in which they offer high rewards for discovering bugs in their platform or code.

My experience with these protocols has been positive, and I would advize you to use them responsibly.

Conclusion

In this article, we described the strategies that we have tried on the Uniswap v3 platform. We also described the strategies that have worked best for us and that we are still using. We have divided them based on the level of risk and the length of time. You may feel inspired to pick up some assets and  try out some liquidity farming. Initially, start small and get familiar with all the strategies you choose.

Diversifying your portfolio is always a good idea, as despite the positive experience of the past, any code is potentially vulnerable to being attacked by hackers, thereby putting your digital assets at risk of theft.

Analyst

René Užovič