Hello frens,
Welcome back to v3 University, where we’re diving into Uniswap’s v3 pools and learning best practices and tactics for this money lego game.
In our first article, we discussed finding opportunities, using the tools located on Uniswap’s site to conduct basic research. With this research, we identify the pools that have a high ratio of volume compared to Total Value Locked.
With some initial research complete, we’ll dig into the details of how to deploy that capital efficiently.
Disclaimer: this newsletter is not financial advice. Smart contracts are risky. Cryptocurrencies are risky. Only work with money you are prepared to lose completely.
Impermanent Loss
Before we begin showing how to make one sided token deposits, let’s discuss why they are helpful. Besides Uniswap v3 pools, most AMMs require users to deposit token pairs. This liquidity is added to the pool, and the user is given tokens representing a portion of their ownership of it. So if 1 ETH costs $1000, a user might deposit 5 ETH and 5000 DAI. If the price of ETH goes up, the user’s number of ETH will go down, while their DAI will increase.
A typical withdrawal from such a pool could result in 4.3 ETH and 5800 DAI. In USD terms (DAI tracks the USD), the user is up by 1600. But in ETH terms, the user has “lost” tokens (they actually just sold them). This is bad for long term ETH bulls, especially those saving ETH for validating, and even worse for accounting purposes. In fact, record keeping simplicity might be the #1 best feature of entering v3 pools using one token.
Furthermore, exotic pairs (ETH + altcoins) can be extremely dangerous, as the vast majority of altcoins (yes, even those special ones you believe in) will drop 95% or lower in a bear market. In this case your ETH will drop and you’ll have an even bigger pile of altcoins worth nearly nothing.
How many users have done this and given up completely on v3 pools, only to miss out on one of the great innovations in decentralized exchanges?
Their loss is your alpha, fren. We’ll start Lesson 4 under the paywall.
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