In today's post, we're diving into the exciting world of adding liquidity to Uniswap V3 and TraderJoe. If you're looking to make your assets work for you, this guide is for you!
Understanding the Basics
Adding liquidity is like setting limit orders on centralized exchange, but here's the twist – it's two-sided and perpetual. The best part? You're actually getting paid!
Let's Walk Through a Real Example
Imagine you have $1,000 USDC, and you want to provide liquidity in the ETH/USDC (0.15%) pool on TraderJoe, with a range of 1700-1800.
Now, let's break down the process step by step.
The fee in this pool is 0.15%. This is a crucial factor as it determines how your funds will be distributed across the specified range of bins.
Providing liquidity or placing limit orders
Given an ETH price of $1,850, with the range outside the current market price, liquidity will be added only with one asset - USDC. Simple enough, right?
Understanding the bins
Your $1,000 deposit in the 1700-1800 range gets divided into 39 bins with 0.15% step. Each bin is filled with $25.64 of USDC (1000/39).
Think of these bins as perpetual limit orders to buy or sell ETH.
When ETH enters your range, these bins fill up with ETH, and you start earning fees.
So when one of your bins is filled with ETH - you just bought ETH with $25.64 of USDC and earned some fees on top.
This bin when fully filled with USDC becomes perpetual sell order for your ETH at the same price you bought it. So in this case you only making money from fees.
Perpetual and Two-Sided limit orders
What's fascinating about this approach is that these orders are both two-sided and perpetual. If ETH falls below $1700, all your bins will be filled with ETH and act like limit sell orders for ETH.
The Ongoing Rewards
As long as ETH stays within your defined range, you continue earning fees.
Uniswap V3 vs TraderJoe
Uniswap V3 uses Ticks instead of bins. The idea remains the same, making it seamless for those familiar with the process.
Adding liquidity through ranges is like setting perpetual orders to buy/sell an asset at predefined price range, while simultaneously earning fees!
Stay tuned for more crypto insights!