How to make money on Uniswap (Lite)
Learn about impermanent losses, how to generate returns, and the best pools to select
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Dear Crypto Natives,
The best money protocols eat money and spit out something valuable.
Maker eats ETH and spits out stability.
Compound eats ETH and spits out interest.
Uniswap eats ETH and spits out liquidity.
Before money protocols only the banks performed these functions. And they required executives, offices, and accountants to do it—the overhead of a firm. Uniswap was built by an unemployed 20-something between gigs as his first programming project.
But you’d be mistaken to underestimate it.
A year after launch Uniswap is doing $22m per week in volume and pooling over $26m in value—over half of which is ETH. It’s beating a $150m competitor, is the highest volume DEX, and showing impressive hockey stick growth.
For the first time in the world anyone with an internet connection can:
Trade (exchange one asset for another)
Earn (by risking assets as liquidity)
List (create a new market by listing an asset)
No permission required.
You know the craziest thing? No one outside our bold little community of mega users yet realizes how big this is. This stuff is Steve Jobs in his Los Altos garage big. It’s Zuckerberg in his Harvard dorm room (but, ya know w/o the evil stuff).
We’re playing ahead of the game. It’s our asymmetrical advantage.
So today let’s level up on the Earn function of Uniswap and figure out how to make money by feeding it money. That’s how this little liquidity robot incents us to make it bigger.
How to make money on Uniswap
You can earn money on Uniswap by providing liquidity through a pair of assets like ETH and DAI. Uniswap uses these assets as liquidity for traders. In return, it shares the trading fees with you.
Note: Providing assets to Uniswap is not like lending on Compound. As a liquidity provider you take unique risks—the returns aren’t guaranteed and you could lose a portion of your principle relative to holding. So don’t add serious liquidity to until you fully understand these risks. Start small—it takes time to wrap your head around this.
Goal: Learn the risks of using Uniswap and how you can earn money
Effort: 30-60 minutes
ROI: Varies—a range of -30% to +30% is not uncommon
Anyone can provide liquidity to Uniswap
Uniswap allows users to swap tokens and ETH by trading against a pool of assets held in a smart contract. There are no order books on Uniswap that set the exchange rate. Instead, the rate is based on the ratio of ether and tokens held in each pool. And the depth of each pool determines how much trading it can facilitate. Deeper pools enable bigger trades and more trading.
These pools are not filled by a company entity like Uniswap, Inc. Instead, anyone can add assets to a pool and earn a share of its trading fees. Liquidity providers earn fees in tokens and ether, based on their ownership of the pool. Fees are collected after each and every trade and liquidity providers have immediate access to their earnings.
This model creates a virtuous cycle for tokens with demand—as more liquidity is added to a pool, the pool facilitates more trades, collects more fees and attracts more liquidity.
Gains and Impermanent Losses
Generating returns on your ETH
Choosing a pool
👉Get started—the best way to learn how to earn on Uniswap is to try it. Just a small amount first. Takes less than 10 minutes. Complete the Weekly Assignment from Market Monday and Zap some liquidity to Uniswap
Earning on Uniswap is a different form of risk and reward than long-ETH folks are used to taking. In the short to medium term its more a bet that there won’t be permanent changes in the price ratio of the pair. In the longer term it’s more a bet on trading volume of the Uniswap pool itself.
Selecting the right pools, understanding impermanent losses, and measuring your returns—these are the first steps to making money on Uniswap.
Compare Uniswap pool returns on pools.fyi and select a pool to try
Complete weekly assignment: Zap liquidity to Uniswap
Filling out the skill cube
Uniswap is one of the most interesting liquidity money protocols we’ve yet seen. Today you leveled up on the protocols layer of skill cube. Nice work.
Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.
Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.