How To Add Liquidity To Uniswap Liquidity Pool: A Step to Step Guide

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uniswap liquidity pool

In this article, we will guide you on how to add liquidity to Uniswap liquidity pool. We published a previous report describing the top liquidity pool providers. Herein, you will learn about one of the well-known liquidity providers; Uniswap Liquidity pool. Beyond an introductory, you will get to know the step by step guide on how to add and remove liquidity in Uniswap. 

Concurrently, let’s begin with a few introductions. Although the first DeFi marketplace that enabled liquidity pooling through automated makers is Bancor, Uniswap has since become more popular. Like other decentralized marketplaces, it operates an open-source liquidity protocol in Ethereum. 

The Uniswap smart contract is written in the Vyper smart contract language. It enables decentralization, censorship-resistance, security, and permissionless utility. Since the launch of Uniswap V1 in 2018, it has become Ethereum’s most popular market maker (AMM) exchange

Uniswap has a dedicated and decentralized protocol for automated liquidity provision for Ethereum token trading pairs. Every Erc-20 to Erc-20 trading pair has a dedicated smart contract that holds reserves of each token. This smart contract also controls how the reserves can be changed. Either you or anyone can become a liquidity provider by depositing tokens into a smart contract and receive pool tokens in return. 

These pool tokens track the share of the total reserves of the liquidity provider. The pool tokens can also be traded for the underlying asset at any given time. The Uniswap protocol is for automated liquidity provision for the Ethereum compliant tokens, ERC-20. It is the smart contract protocol that holds token reserves and determines the things that can be altered. 

The Uniswap Liquidity Pool

Now let’s talk about the Uniswap Liquidity pool. We shall discuss how they work and whether it is suitable for everyone or a particular group of people. Uniswap is a decentralized ERC-20 exchange, but it is not designed for tokens only; it also supports Ethereum. We can also see Uniswap as an exchange protocol that permits you to trustlessly exchange ERC-20 tokens.

Uniswap Liquidity pool gather tokens in a smart contract model, and users trade against the liquidity pool. On Uniswap, you or anybody can easily swap tokens; add tokens to a pool to earn some fees. You can also list a token on Uniswap. 

The good thing about the Uniswap platform is that you can easily exchange Ethereum for any ERC-20 token. This exchange happens in a decentralized manner. You are not dealing with any company, there is no KYC involved in 

The exchange and there is no intermediary facilitating these transactions. 

Centralized platforms hold your money, and they charge you for holding your money, but the Uniswap platform is the opposite. Uniswap is a decentralized exchange where you always have complete control of your money. Once you initiate a transaction, it immediately takes the money out of your wallet and puts it back in another format. This is how it ensures that there is no censorship. 

Yield farming on Uniswap

Yield farming allows you to make more money with your crypto assets. To do that, you have to become a liquidity provider.  Uniswap allows you to become a liquidity provider. 

Uniswap Fees

Concurrently, on signing up on the platform, you are sharing 0.3% of the transaction fees on the pools. Therefore, if you provide, say, 40% liquidity to liquidity pool then you will earn 40% of the transaction fee.

However, you can track how much you earn. To do that, simply create an account here

Tracking your earnings is as easy as the following: 

1. Sign up to the Uniswap webpage to enter your address shown. 

uniswap

2. Click the “Analyze ROI” for the system to process your liquidity position and display them on the summary table.

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3. Go on to click the address and you will see the ROI and other KPIs.

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How Uniswap Liquidity Pool works

We will go further to explain the functionality of the Uniswap Liquidity pool. The liquidity pools are an aggregation of tokens in smart contracts. In this liquidity pool, there are enough ERC-20 tokens for you to swap, send, and Pool with another. It is noteworthy that Ethereum serves as the conduit. 

Uniswap Liquidity Pool
Uniswap Liquidity Pool’s working | Source: Uniswap

This means that the pool contains a high number of Ethereum and other ERC-20 tokens on the Uniswap exchange. Therefore, you can create a new exchange pair in a new liquidity pool for any token of your choice. Concurrently, It is entirely open to everyone.

For example, you can be part of the ETH/DAI liquidity pool. You will have to make an equal value of Ethereum and the ERC-20 token that you want to participate with. If I want to join in the ETH/DAI on Uniswap Liquidity pools, you must have the exact amount of both DAI and Ethereum simultaneously. Therefore when someone comes in and decides to trade DAI to Ethereum on Uniswap, your liquidity will be taped. 

However, you could have an impermanent loss. This happens when your money tilts towards either Ethereum or DAI. Meanwhile, the impermanent depends on the trade that needs to take place at that time. 

If someone wants to trade Ethereum in exchange for DAI, your DAI liquidity might shrink while Ethereum liquidity goes up. If your DAI goes down by a dollar, your Ethereum should go up by the same margin. This is the way that the Uniswap Liquidity Pool work. 

Also Read: Top 10 DeFi Liquidity pools

How To Do Yield Farming On Uniswap V2

You will see “clickable” buttons like Swap, Send, and Pool on the exchange platform. The “pool” is where you can either add liquidity, remove liquidity, or create your exchange pair. Uniswap is designed so that you can add or remove the liquidity pool on the platform. We will explain how you can carry out these tasks without running into any trouble along the line.

uniswap

You will see “clickable” buttons like Swap, Send, and Pool on the exchange platform. The “pool” is where you can either add liquidity, remove liquidity, or create your exchange pair. Uniswap is designed so that you can add or remove the liquidity pool on the platform. We will explain how you can carry out these tasks without running into any trouble along the line.

How to create liquidity pool on Uniswap V2

Creating a liquidity pool is similar to creating your own exchange. This allows you to control your tokens. Here are steps on how to create a pool: 

1. Start by visiting the website.

2. When a Metamask Notification popup, click on the Confirm button to connect Uniswap to your account.

3. Click on the Pool tab. 

eth

4. Go through the dropdown, to select “Create Exchange”. This could mean creating an exchange.

5. Copy your token’s contract address (from Etherscan for example). 

6. Paste the address on the Token Address field, and select it from the dropdown. 

7. Click on the “join pool” button. 

8. Metamask Notification popup shows, click on the Confirm button

How to Add Liquidity to Uniswap Liquidity Pool

Before adding a liquidity pool, below are steps to follow. More so, there are basic requirements, for instance; MetaMask or other Web3 wallets and tokens. Concurrently, you can find the steps herein; 

1. All you have to do is log on to the site of Uniswap (https://uniswap.exchange). When done, click on “Join Pool” to navigate the interface for adding liquidity.

uniswap

2. Search for pools. For instance, you could prefer to TEND, KIMCHI, Dai or any other pools.

Uniswap ROI

3. You can then click on “add liquidity” located on the left side just above the deposit field. Uniswap will show you the balance found on your connected wallets (Eth and other ERC-20 tokens). You will also see the exchange rate and the share of the liquidity pool. 

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4. After you enter the ETH or DAI value, Uniswap will autofill the correct amount of the other assets depending on the current exchange rate. 

5. You can click on the transaction details to see more information, such as the number of liquidity tokens you will be minting. The details will also come with the value of the tokens you want to mint. 

6. Now you click the blue “add liquidity” button. For those of you using the MetaMask wallet, you can adjust the gas and then click “confirm.” The attached image shows the number of Dai tokens. 

uniswap

7. Once the transaction has been confirmed on the Ethereumblockchain, you are done with your task. You will see your updated ETH and DAI balances and your share of the trading pair’s total liquidity pool. 

uniswap

How to remove liquidity on Uniswap liquidity pool

remove Liquidity

Before you can remove liquidity on Uniswap, click on “pool” then the pair that you provided liquidity too

  1. Click ‘Remove Liquidity’ on the DEX interface
  2. Select the amount of liquidity to remove that you wish to withdraw from the Uniswap Liquidity pools
  3. Confirm the removal
  4. Confirm the transaction
  5. Proceed with final confirmation

Conclusion

We hope that this guide is of great help to you and would help you decide whether Uniswap Liquidity pools are for you. You can decide to try it out with a small amount as you like; it’s all your choice. 

FAQs

What are Liquidity Pools?

They are pools of tokens locked in a smart contract to facilitate liquidity. Typically, the function of liquidity pools is to allow traders to trade their digital assets while earning rewards on their asset holdings. 

What is Uniswap V2?

Uniswap V2 is the iteration and improvement of Uniswap V1. it includes the following feature; 

  • ERC20 / ERC20 Pairs
  • Price Oracles
  • Flash Swaps
  • Core/Helper Architecture
  • Technical Improvements
  • Path to Sustainability
  • Testnet and Launch Details

Difference Between Uniswap V2 and V1?

Uniswap V2 is simply an improvement of V1. while the Uniswap V1 is built on Ethereum blockchain, the V2 is a separate blockchain. 

The uniswap V1 requires liquidity providers to deposit an equivalent value in ETH for every token they add to a pool. whereas, Unswap V2 is implementing ERC-20/ERC-20 liquidity deposits.

How to make money with Uniswap pools?

You can make money as a liquidity provider at Uniswap. For instance, for eerie liquidity you provide, you earn 0.3% of the pool. 

How do you calculate pool liquidity?

Use X*Y =K to determine the pool liquidity. X, Y and K represents the value of ETH, ERC-20 token and Constant respectively. The above equation represents demand and supply of ETH/ERC-20 token and it uses that to balance the price of pooled token. 

How to find the most profitable pool?

For more profitable pools, consider volumes, pool ROI, and so on. to do that, check here

What are the liquidity risks?

  • Impairment loss,
  • fees and
  • posible smart contract bugs. 

Kindly share your questions and contributions using the comment box provided below. 

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Source: How To Add Liquidity To Uniswap Liquidity Pool: A Step to Step Guide

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