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Impermanent loss
The Ultimate Beginner’s Guide to Providing Liquidity on Uniswap V3
The Ultimate Beginner’s Guide to Providing Liquidity on Uniswap V3 If you’ve ever wondered how people actually make money in DeFi beyond just buying and holding tokens, liquidity providing on Uniswap V3 is one of the most powerful and widely used strategies in all of decentralized finance. This guide is built for complete beginners but goes deep enough that even intermediate users will walk away with new insights. Let’s turn you into a confident, profitable liquidity provider.Why Provide Liquidity in the First Place? When you trade on Uniswap, someone has to be on the other side of that trade. That “someone” is the collective liquidity in the pool. By depositing your tokens, you become the market maker and earn a percentage of every single trade that happens in your pool — 24 hours a day, 7 days a week, while you sleep. Uniswap V3 (launched May 2021) completely changed the game with concentrated liquidity. Instead of your capital being spread uselessly from price 0 to infinity (like V2), you now decide exactly which price range your money works in. This can give you 50–4000× more capital efficiency than V2, meaning dramatically higher fee yields — but it also introduces new risks we’ll cover in extreme detail.Core Concepts You Must Understand Before Depositing a Single Dollar 1. Liquidity Pool A smart contract that holds reserves of two tokens (e.g., ETH and USDC) and allows anyone to swap between them using the constant-product formula (or concentrated version in V3). 2. Concentrated Liquidity (The Big Innovation) You choose a custom price interval such as $1,800–$2,800 for ETH/USDC. Your capital only earns fees when the market price is inside that interval. The narrower the range, the more fees you earn per dollar when in-range — but the higher the chance you go out-of-range and earn nothing. 3. Fee Tiers Uniswap V3 offers four tiers per pool:0.01 % → stablecoin & pegged assets 0.05 % → tightly correlated pairs (e.g., stETH/ETH) 0.30 % → standard volatile pairs (ETH/USDC, BTC/ETH) 1.00 % → exotic or extremely volatile pairsHigher fee tier = more fees per trade, but usually lower trading volume. 4. Impermanent Loss (Explained Below in Exhaustive Detail) 5. Total Value Locked (TVL) & Volume Always check DefiLlama or the Uniswap Info page. Higher TVL + high 24h volume = safer and more profitable.Impermanent Loss: The Most Misunderstood Risk in DeFi Impermanent loss (IL) is the difference in value between:Holding the tokens outside the pool, vs Depositing them into the pool and withdrawing later when prices have changedWhy Does It Happen? Uniswap pools must always maintain roughly 50/50 value of both tokens. When the external price of one token rises, arbitrageurs buy the cheaper token from the pool until the ratio rebalances. This forces you to sell the appreciating token at a discount and buy more of the depreciating one — exactly the opposite of what you want. Exact Impermanent Loss Formula (for full-range positions ≈ Uniswap V2/V3 full-range) Real-World Impermanent Loss TablePrice Change (Token A vs Token B) Impermanent Loss±10 % 0.3 %±25 % 0.6 %±50 % 2.0 %±100 % (2×) 5.7 %±300 % (4×) 13.4 %±500 % (6×) 18.5 %±900 % (10×) 25.5 %In concentrated liquidity the story is very different:If price stays inside your range → IL is actually lower than full-range If price leaves your range → you can suffer near-100 % loss of the winning token (minus fees earned)Example Walk-through (Numbers Every Beginner Should Memorize) You deposit $10,000 → $5k ETH + $5k USDC when ETH = $2,000Later ETH pumps to $4,000 (2×) If you had just held→ $5k ETH becomes $10k + $5k USDC = $15,000 → +50 % If you provided full-range liquidity→ Pool forces you to sell half your ETH gains→ You end up with ≈ $14,142 → only +41.42 %→ You suffered 5.7 % impermanent loss vs holding Now imagine you chose a narrow range $1,900–$2,100. When ETH hits $4,000 your position becomes 100 % USDC — you missed the entire rally. That’s the trade-off.Proven Strategies to Minimize or Completely Avoid Impermanent LossStrategy IL Exposure Typical APR Difficulty Best ForStablecoin pairs (USDC/USDT/DAI 0.01 %) Near zero 2–20 % ★☆☆☆☆ Absolute beginners, parking cashstETH/ETH or cbETH/ETH 0.05 % Extremely low 4–25 % ★★☆☆☆ ETH bulls wanting yieldFull-range major pairs (ETH/USDC 0.3 %) Same as V2 8–30 % ★★☆☆☆ Long-term HODLersWide active range (±40–60 % around price) Moderate 20–100 % ★★★☆☆ Balanced approachMedium range (±15–30 %) High when wrong 50–300 %+ ★★★★☆ Experienced, actively monitoredNarrow range market making Very high 100–1000 %+ ★★★★★ Professional LPsSingle-sided liquidity (via vaults) Zero Half fees ★★☆☆☆ Strongly directional viewHedged LP (LP + short/long perps) Can be near zero Fees – funding ★★★★★ Advanced usersMost Popular Beginner Strategies in 2025USDC/USDT 0.01 % on Base or ArbitrumAlmost zero IL, 5–15 % real yield from organic volume, gas < $0.10.Full-range ETH/USDC 0.3 % on Mainnet or ArbitrumIf you planned to hold ETH anyway, you earn 10–40 % extra yield with the same IL as just holding.stETH/ETH 0.05 %You earn staking yield + liquidity fees + tiny IL because the peg rarely breaks.Detailed Step-by-Step Walkthrough (With Screenshots in Mindset)Choose Your Network WiselyEthereum L1 gas is expensive. Start on Arbitrum, Optimism, Base, Polygon, or zkSync Era.Go to app.uniswap.orgClick “Connect Wallet” → MetaMask/Rabbit/WalletConnect.Navigate to Pool tab → “New Position”Select Token PairType or choose (e.g., ETH and USDC). Always double-check contract addresses on volatile tokens.Choose Fee TierUniswap shows recommended tier — follow it unless you have a strong reason not to.Set Your Price Range Beginners: click “Full Range” Intermediate: use the preset buttons (Narrow, Common, Wide) Advanced: manually drag or type exact pricesPro move: look at 90-day price history on DexScreener or Coingecko and set range to cover most of that period.Deposit AmountYou can deposit uneven amounts — Uniswap auto-calculates how much of the second token is needed.Approve TokensFirst transaction approves spending (one-time per token). Second transaction creates the position.Confirm & WaitPosition appears under “Your Positions”.MonitorUse Uniswap Info, DeFiLlama, or tools like Zapper, Zerion, or Apespace to track fees earned.Tools Every Serious Liquidity Provider Uses in 2025Tool PurposeDefiLlama TVL & volume across all poolsinfo.uniswap.org Official analyticsDexScreener Real-time charts & range suggestionsGamma Strategies Auto-rebalancing vaultsArrakis Finance Advanced single-sided concentrated liquidityRevert Finance Visual impermanent loss simulatorTenderly / Etherscan Simulate transactions before sendingReal-World Example: $10,000 Position Walkthrough Let’s say ETH is $3,300 today. You decide on ETH/USDC 0.3 % fee tier, range $2,500–$4,500 (±36 %). You deposit $10k → ~1.52 ETH + ~$5,000 USDC. Over the next 6 months:Pool earns $1,200 in fees Price stays mostly inside your range You suffer only ~2–3 % IL because range was wide → Net return ≈ +9–10 % (much better than just holding)If you had chosen a narrow $3,200–$3,400 range:Fees could have been $4,000+ But if ETH went to $4,200 → you’d be 100 % USDC and missed the rallyChoose your risk level consciously.Advanced Topics Worth KnowingTick spacing: each fee tier has minimum tick distance (prevents spam) Range orders: using concentrated liquidity as a limit order Fee compounding: harvesting reinvesting fees dramatically increases long-term APY Liquidity mining programs: some pools have extra token rewards (check GeckoTerminal)Final Checklist Before You Deposit Have I chosen a high-volume pool?Is my range reasonable for my time horizon?Am I on a low-fee L2?Do I have a plan if price moves 50 %+?Am I comfortable losing some value to IL in exchange for fee income? If yes to all → go for it.Conclusion: Your Path to Becoming a Profitable LP Uniswap V3 turned liquidity providing from a passive, mediocre-yield activity into one of the highest-return strategies in crypto — when done correctly. Start simple: Do your first position in a stablecoin pool on Base or Arbitrum Graduate to full-range ETH/USDC Experiment with wider active ranges Eventually try managed vaults or narrow ranges once you truly understand the mechanicsRemember the golden rule:“The best liquidity providers are the ones whose price range contains the market price for the longest possible time.”Master that, and you’ll be printing fees while everyone else is just hoping for the next 100× meme coin. Now go add some liquidity — the pools need you. Happy yielding!