How to make 100%+ returns using Uniswap v3 Liquidity Pools

You have a large choice of Uniswap v3 Pools to choose from

Fair warning for Noobs

This blog is intended for experienced users. If you have never put assets into a liquidity pool, or don’t understand the difference between Uniswap’s v2 and v3 pools, then maybe you want to read a beginner’s guide to Uniswap pools. On the other hand, if you are a fast learner, you will understand everything below.

Not financial advice

Nothing in this blog should be taken as financial advice. I am not your financial advisor. I am not your nanny state. Nobody is going to protect you if you screw up and lose it all. The prices of digital assets, go up and down very fast. The percentage changes in a single day can be huge. You can easily and quickly lose 100% of your investment. Nothing mentioned in this blog is likely to perform according to my expectations. The complete opposite might happen. Consult a financial advisor before you do anything and listen to your spouse (they always know best what you shouldn’t do). Only read-on if you are prepared to lose 100% of your investment.

Different tokens pairs can have different returns

When you look at all the v3 pairs available, you will be presented with 27 pages of pools and statistics which looks something like this:

The 10 largest Uniswap v3 Pools

Skill and guesswork are needed.

You need to pick the right pairs. If you want to maximise your returns, you need to examine all the available pairs. That takes time. Then you are going to need to use both skill and guesswork in setting the parameters to optimise the returns according your objectives.

How to choose the right token pair (for you)

Eliminate all scam and meme coins

There are around 270 pairs. You won’t have time to study them all. As a first step, I would eliminate all pairs of coins you have not heard of. Don’t include any suspected meme or scam coins, even if the return seems high.

High Return Pairs

Firstly I want to draw up a short-list of pairs which have relatively high trading volume relative to the Total Value Locked (TVL). This will tell me which token pairs are likely to have a good return.

Draw up a short-list and calculate the return for each pair.

Here is my short-list:

Average annual historical fee returns based on the previous 7 days volume:

DAI-ETH (0.3%) 22.7%
GET-ETH (1.0%)123.2%
LINK-ETH (0.3%) 34.8%
MATIC-ETH (0.3%) 26.4%
MKR-ETH (0.3%) 2.9%
UNI-ETH (0.30%) 10.1%
USDC-ETH (0.05%) 54.2%
USDT-ETH (0.05%) 86.6%
WBTC-ETH (0.05%) 21.4%
WBTC-renBTC (0.05%) 1.9%

Average returns can be improved upon

Set the parameters right, and your returns will be much higher than the average.

Experiment: Can I make 100%+ p.a. return?

I am going to try to do this using the Token GET (GET Protocol) which you can see on my short-list above.

Why GET?

The GET-ETH pair has a number of the features I am looking for — small pool size and relatively high traded volume. It’s not a scam or meme coin. It is in daily use.

Small pool size

I am looking for a token where the Total Value Locked is small. In other words, my addition to a small pool will earn me a larger share of the transaction fees. GET meets that requirement.

GET Protocol Tokens

GET is used in pop-concert tickets to prevent scalping and ticket fraud. It has been around for 4 or 5 years and is still going strong. There are regular blogs from the developer team. There are lots of current developments going on. There’s an active and loyal community.

GET seems like Good Value

It’s a small-cap token, with a fixed, fully issued, supply. The small size means that it could move fast. Right now, the price of the token is less than a third of its recent peak. I think the potential is for the token to move up. That’s important. I want to pair my Ethereum with a token which has good prospects to rise.

Maximising the Return

Let’s see how I can use my skill to make a good return by putting some GET and ETH into a pool. You can apply the below techniques to any coin that you want to put in a pool. I am just using GET because it seems like a really good choice to me. You may find a better choice.

Trading Volume:

The more other people trade, the more fees you will earn. I can immediately see that GET has had relatively good volume in the last 7 days, compared to many other tokens.

Try to pick a pair where the volume is high relative to TVL

Buy a token where you think the volume of trading will increase

I expect the volume of trading in GET to increase. There are various new developments on the way. As these developments are announced, it should attract more investors. You can read about upcoming developments on the GET Protocol website. Specifically these include the “Digital Twin” and the “NFT Event-Financing tokens”.

Fee:

With Uniswap v3 you have 3 choices of fee that you can choose. 0.05%, 0.30% or 1.00%. For many pairs only one of the three fee levels has been created. You can create another one. That’s an expensive process likely costing more than $1000. I would not do it.

Pick the fee you want to earn on each trade

Range:

The narrower your range, the more you will make while the token remains in range. This is because your share of the trading at each price point will be higher. There is also the added benefit of more total volume moving to v3 from v2 (See “Trading Volume” above).

Amount of tokens locked (X scale) at each price (Y scale)
White vertical bar is where my mouse is. Red vertical bar is the current price

Picking the range

The wider your range, the longer it will stay in the range. The longer the token price remains in your range, the more you will earn. On the other hand, with a very wide range, your share of the fees will be lower. It’s a trade-off. You need to use your skill to decide what will work out best. Look at the past chart to have a guess at how long the price will stay in your range. Here is the chart of GET per ETH over the last few months.

A chart can help you select the best range

Working out how much you will earn

This is pure speculation, but it is educated speculation.

Use Excel to help you calculate expected returns.

Impermanent loss:

If the price ratio between the two tokens deviates from the original ratio, you will have what is called an “impermanent loss”. When you withdraw your tokens from the pool the total value of the two tokens will be less than what it would have been if you had done nothing. Fees earned will compensate you for the loss. The longer you earn fees, the more likely it is that the fees you earned will cover any impermanent loss. Time and lots of fees are your friends.

Avoiding Impermanent Loss

You can avoid the potential “impermanent loss” by “single-side staking”, or nearly single-side staking. Let me explain. In my case, I like GET protocol, so I was happy to buy it at the current price. I used about 16 ETH to buy the approx 18k GET. That’s what I am going to put in the pool. Only three things can happen:

  1. GET goes down relative to ETH. In that case I will keep all of my GET. I am happy to keep it because of the great prospects.
  2. GET goes up relative to ETH. In that case the GET put into the pool will be gradually converted to ETH. If the GET price rises from 1118 to 764 (GET per ETH), then all of my GET in the pool will be converted to ETH at an average rate of 941 GET per ETH. That means I will receive 18.66 ETH (plus all the fees), which is more than the 16 ETH I started with, so I will be in profit. It might not be in as much profit as it would have been if I had kept the GET without putting it in the pool, but it’s still a nice profit.
  3. After rising and falling the price returns to the original level of 1118 GET per ETH. In this case I will be happy because I will receive back the same number of tokens that I started with. In addition I will have earned the Liquidity Provider fees.

Skill based investing

By tweaking each of the above parameters, you can improve your chances of maximizing your return.

The Proof of the pudding is in the eating (or not)

Now it’s time to put my strategy to the test. It’s around 9pm. I will need to let the strategy run for 24 to 48 hours before I publish this blog, so you can all see how I am doing and whether I am achieving the hoped for 100% p.a. returns.

Adding Liquidity to a Uniswap v3 Pool

Before

Number of tokens pooled at each price point

After:

Number of tokens pooled at each price point

Liquidity pool token

I have now finalised my investment into the GET-ETH liquidity pool. Let’s see what it looks like:

All pool tokens can be viewed as NFTs

Update after 1 hour

Whoah! That was quick. I already earned $6.99 in fees in less than an hour. I can’t wait to see how much it will be tomorrow when I wake up.

Update after 24 hours

The NFT updates its value in real time

Fees

I have not discussed the impact of fees. Entry and exit from a pool incurs GAS fees for using the Ethereum network. The fee is related to the cost of gwei at the time of the transaction, and not to the size of the transaction. You want to be doing your pool transactions when the price of gwei is relatively low. With the price of transactions at around 100 gwei it will be costing you over $100 to do a pool transaction. This may be insignificant if the size of your investment is large, the fees earned high, and the investment period is long. The opposite is also true. Fees can take a big bite out of smaller investments.

Conclusions

The Uniswap v3 pools gives the investor much more control over his investments. In v2 the pool range is set from zero to infinity, and there will always be equal amounts, in value, of each token — 50%/50% . All investors earn the same percentage according to the value locked.

Did I receive the expected 100%+ return?

Answer: Yes (so far).

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