One exciting aspect of Uniswap’s V3 design is its extreme flexibility.
While V2 allowed us to provide liquidity passively, Uniswap V3 can be used as an active instrument in our investment toolbox.
One interesting, alternative use case is using the price range to simulate a limit order, entering or exiting a trade while receiving fees for doing so.
I tried this strategy out myself and this is what happened…
My first hand experience
After Uniswap V3 launched I decided to take a small portion of my ETH and test this strategy out.
The price of ETH at the time was around 3100 USD and I decided to set a min range of 3593 and a max range of 4104 with the idea of closing the LP once my ETH would be completely converted into USD.
I opened my LP position depositing only ETH into Uniswap.
When setting a V3 LP strategy, we need to imagine how the market will behave in the future. My view was that ETH would take at least a month to reach over 4100. This would give me a good amount of time to generate fees.
Tip to remember: in Uniswap V3, a smaller difference between the min and max limit implies higher concentrated liquidity, which implies a higher Fee collection potential, but also results in a higher price risk (“Impermanent Loss” risk).
How did it go
Well, my guess was wrong! The market in the next few days rallied hard and arrived at over 4104 in 5 days (out of my price range).
However I was also lucky in a way.. the gas fees on Ethereum have been so high in the same period that I decided not to closed my position yet.
Since the price went back into my range I started earning again!
Note: It is important to keep in mind when using this strategy: if the price of ETH goes back under your max limit then your liquidity will be activated again, and you will start buying back ETH (while earning fees); to avoid this from happening the LP position should be closed once the price is higher than the max limit.
My earnings and learnings
ETH rallied in the 5 days after I opened my LP limit order position exiting my range fairly quickly.
The return generated by trading fees before being moved completely to USD was around 1.5%. (excluding ETH transaction costs).
ETH retraced a few days after and went back into my range. At the time of writing the price is still below 4104 .Since then my LP generated an extra 0.8% return (in around 2 days).
This experiment taught me some important lessons about V3 and using it to set up a limit order strategy:
- It is very difficult to set the optimal price range for a strategy. Markets can’t be controlled and it is near impossible to forecast the behaviour of prices in the future (even in the short term); being flexible and open minded to correct your view based on circumstances can be really important. The decision of not closing my position immediately after the limit order was completed is proving profitable (generating 1.5% + 0.8% and counting).
- Setting up and managing a Uniswap V3 LP strategy is expensive when you account for Ethereum fees. The profit generated by my LP position only barely cover the fees necessary to open it. Additionally, a spike in Ethereum transaction fees prevented me from operating and closing my strategy. In this case this proved to be an advantage but is an important risk to be considered.
I am very much looking forward to the level 2 optimistic roll-up solution to be released when network fees will not be a concern anymore.
Simulation of my strategy was done using the Uniswap v3 simulator at defi-lab.xyz
