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How to Become a Liquidity Provider on Uniswap A step-by-step guide to using liquidity on the DEX

Uniswap is a decentralized financial exchange, or DEX, that allows anyone to participate in the financial transactions of Ethereum-based tokens without a central body or intermediary.

It strives to provide users with permissionless access to financial services with security and immutability and without fear of discrimination or counterparty risk.

Because Uniswap is built on the Ethereum blockchain and uses smart contracts, Uniswap replaces traditional centralized market instruments such as exchange listings and limit order books with automated and permissionless liquidity pools run solely by algorithms.

A liquidity pool is a crowdsourced pool of cryptocurrencies, or tokens, locked in a smart contract used to facilitate trading between assets on a decentralized exchange (DEX). Read more about UniSwap here.

Here is a tutorial on how to become a liquidity provider on UniSwap:

Go to UniSwap official website and click Start app and it takes you to app.uniswap.org:

First you need to connect your wallet to UniSwap, in this tutorial we use MetaMask as an example. Click on connect wallet:

A list of wallets should appear and you can select your desired wallet. First, we will show you how to connect MetaMask, which is on the wallet list, to UniSwap. So choose MetaMask:

Select your desired account and click Next:

Choose Connect:

Great! Now your MetaMask is connected to UniSwap and you should be able to see your balance and wallet address at the top of the page.

To become a liquidity provider you need to click on pool:

Choose + New job:

Here you should choose a pair, in this tutorial we use ETH, USDT. Then select a pool type based on your preferred liquidity provider’s fee. Since ETH, USDT is a shared pool, we choose the 0.3% fee:

The 0.05% fee tier works best for token pairs that trade at a fairly fixed or highly correlated rate, such as stablecoin-stablecoin-token pairs (e.g. USDT-USDC). Liquidity providers take minimal price risk in these pools and traders expect to pay minimal fees.

The story goes on

The 0.3% fee tier is ideally used for less correlated token pairs like the ETH-DAI token pair that are subject to significant price movements both up and down. This higher fee rather compensates liquidity providers for the greater price risk they take compared to stablecoin liquidity providers.

The 1.00% fee tier is designed for exotic assets where LPs take extreme price risk. Relevant assets are those that are subject to particularly monotonous price movements.

Now you should type a price range. You should consider the extent to which you expect prices to move over the life of your position and know that if the price is outside your range, you will not earn any trading fees until it is within your chosen range returns.

Enter the value in one of the deposit amounts box and the other box will be filled in automatically, then click Approve USDT:

Confirm it on MetaMask:

click on preview and check the details:

After reviewing the details, click Add to and confirm the transaction on MetaMask:

Great! Your assets now provide liquidity for UniSwap traders and you earn fees and you receive the LP tokens in your wallet.

How to redeem liquidity at UniSwap

Go to the Pool section and select the desired pair from the Pools Overview part.

Click on Remove Liquidity:

Choose the amount of provided liquidity you wish to withdraw and select Remove:

Confirm the transaction on your MetaMask:

Here we go! This was our tutorial on how to become a liquidity provider on UniSwap and how to redeem liquidity on UniSwap! You can also watch this video.

If you want to learn how to buy crypto on UniSwap, check out this tutorial!

This series article is for general guidance and information only for beginners participating in cryptocurrencies and DeFi. Nothing in this article should be construed as legal, business, investment or tax advice. Consult your advisors for all legal, business, investment and tax implications and advice. The Defiant is not liable for lost funds. Please use your best judgment and exercise due diligence before interacting with Smart Contracts.

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