I would guess that some of you have already heard about Uniswap Exchange by now, if not then you may want to check out this post which explains what Uniswap Exchange is all about.
Now once we got that out of the way, let’s talk about Liquidity Pools and now you can make a profit out of it.
Liquidity Pools are basically you providing liquidity to the exchange in other words, you become a shareholder of a particular pair for example ETH/wBTC .
To be able to provide the liquidity you would need to place in any amount of liquidity into the pool. The only criteria you would need to comply if that if you place in 1 ETH then you would also need to put in 1 ETH worth of wBTC as well as the image below shows.
The more you put in, the more % of the total liquidity pool you would receive.
Why is the % of total the liquidity Pool important?
Well… basically how much fees you receive as a liquidity provider is really depending on how much of your contribution of the pool fees you provide.
How do I make money?
If you are familiar with exchanges, you would then know that every transaction that you do, you would need to pay a transaction fee. This is normally about 3% or less depending on the exchange.
So instead of giving the money to the exchange, each time someone swaps a token on Uniswap and its the pair which you have provided liquidity for, you will earn a % of that transaction fee. How much would depend on how much share % of the liquidity pool for that particular pair?
For example if you hold a 10% of the liquidity pool for the pair of ETH/wBTC then whenever someone swaps using this pair, 10% of the fees for swapping comes back to you.
The rate for the transaction which is set my Uniswap is currently 0.3% which is meant to encourage more people to use this as a service.
Which Pairs are most profitable at the moment ?
At this current moment, it shows that ETH/wBTC uniswap pools would give you a profit of about 6.55% over the next 30 days.
So how can I monitor my income from Uniswap ?
Here is a really good tool to have just to check the pools which are going to give you a return on your investment and also what your current profits are.
Long Term Gains not Short Term
Ok, if you are thinking that you would be a multi millionaire overnight then Uniswap may not be for you. The gains are long term and you would expect a gain of about 4% – 8% APR depending on the pairs you are providing liquidity for.
Those pairs which gets swapped a lot are the ones which will be giving you some of the best profits.
How should I decide to be a liquidity pool shareholder?
If you have ETH which is just sitting down somewhere and not doing much, or even if you have BTC which is just sitting down in your wallets. Why not invest in a pool which will increase your volume gradually.
Once the price goes up, you could just withdraw from the pool together with all your earnings and cash out.
More references of Liquidity Pools can be found here, or you can search YouTube for a lot of videos about this
Since DeFi is such a new topic and a lot of people are just getting into it. You’d be surprise on how many ways you are able to earn nicely from scouting around and finding trade opportunities.
I would share more soon and I do hope that you start to get curious as to how DeFi challenges the banks in so many ways and how to take advantage of it to receive some profits.