Are you looking for ways how to make passive income on crypto? Aside from buy-and-hold and dollar-cost averaging, known as the most common and trusted strategies in making a fortune in crypto, we have found another probable way in investing on crypto that could very well suit your investment-risk appetite.
Uniswap, according to DataDrivenInvestor, is another method to make passive income while hodling cryptocurrency.
A brief overview on Uniswap: it is a decentralized crypto exchange platform where anyone could swap their tokens anytime. Then, where does this passive income we were talking about comes from, you ask?
To make sure they have enough of each token whenever users need to swap their holdings to, they are offering a way wherein it’s a win-win situation for them and investors, likewise. To them, they will be assured of liquidity. To investors, they earn while they provide liquidity to Uniswap platform. In short, investors are lending their tokens to provide liquidity for Uniswap and in turn, they earn a part of the fees Uniswap generates on the swaps/trades.
Now, the process is a bit complicated for first time users so we have taken a snapshot for each step to help and guide you. But once you get used to it, just like anything, it’s just a piece of cake.
Things you need to do before you can add liquidity on Uniswap V3
Connect Your Wallet To Uniswap
You need to connect an Ethereum wallet. Uniswap supports many of the most popular crypto wallets like Trust Wallet, MetaMask, and Coinbase Wallet, among others.
For the sake of this blog, we will use Metamask. You can check out how to create Metamask wallet using your browser here.
Go to https://app.uniswap.org/ and click ‘Connect Wallet’.
Also, you can choose which blockchain you wanted to use. If you click ‘Ethereum’, you’ll see different options.
Since gas fees on ETH, especially when congested, can get too high and expensive, we’re opting Polygon network in this blog.
(Polygon is a Layer 2 solution that works atop the Ethereum platform. If you need help on how to add Polygon Network on your Metamask, click here.)
After you click, ‘Connect Wallet’, it will then prompt you to confirm the connection.
Add Funds To Your Connected Wallet
Make sure you have enough funds on your wallet to open a position on Liquidity.
So, I’ve sent some MATIC to my Metamask.
Then, checking our data on Uniswap Pools, we’ll be trying out LUNA/WETH pair for our Liquidity pair.
And since we’ve chosen LUNA/WETH pair, we need to have enough of both that can cover our desired liquidity position.
Have Enough of Both Tokens For The Desired Liquidity Pair
Depending on your funds, you can check how much of each token you need. Let us test by going to the add liquidity link of LUNA/WETH pair here. (I followed the ideal liquidity bound according to our data (screenshot above). Although sometimes, Uniswap will adjust the numbers slightly.)
You can test out any amount on LUNA, then get a corresponding amount of required WETH and vice versa.
We do this since the tokens needed depends on the bounds you’ve set and not ideally a 50-50 share. There’s a chance you might need more of LUNA for that bound like what’s happening in this situation.
Then we can now go to swap page, we’ll use Uniswap but you can also use the Metamask Swap function also, then swap our available MATIC to LUNA and WETH.
Since, it’ll be the first time we transact on our Metamask account using uniswap, it asks you to confirm the swap amounts right after.
This same process applies to the WETH swap and gets repeated every time you make a transaction on Metamask via Uniswap.
Now, let’s try and test out the tokens on our liquidity position.
Approve Spend Limit
Going back to the Add Liquidity page, we have to approve the spend limit on each token. (You only do this the first time you use a coin on Uniswap.)
Click ‘Approve’. Then a pop-up from Metamask will prompt you to confirm the transaction.
Then be patient as after clicking ‘Confirm’, Approval process can get too long. In my case, I have to wait around 45 minutes.
I checked the transactions on my Metamask account and it’s been showing ‘Pending’ and ‘Queued’ for quite some time. So if you experienced this, or even longer, say hours, it is perfectly normal.
Finally, Let’s Add Liquidity
Now, back to the Add Liquidity page. We are now able to continue this transaction.
Confirm transaction by clicking ‘Add’.
Metamask asks you to ‘Confirm’ transaction.
Add Liquidity successful. Also, see that small pop-up on the top-right corner? All executed.
You can now see your Active Liquidity Position in the Pools Overview.
If you click that LUNA/WETH position, you’ll see something like this:
You’ll see the total value of your Liquidity Position in USD.
‘In range’ means the current price of that pair is within the liquidity bounds you’ve set. And as long as it stays in range, you get to earn fees for every swaps or trade done on that pair.
After 8 hrs… we now have $0.07 worth of fees.
Also note that the value of your liquidity position varies as actual market price changes. It could go up or go down.
After about 36 hrs, we have accumulated around $4 of fees (although the value of our coins went down).
Another note: our liquidity position could go out of range, too! If so, you can decide whether to keep your position and wait until it gets back within range or close the position.
Closing Your Position
To close your position, you first need to collect the fees you have accumulated while holding the position.
Click on ‘Collect Fees’.
Then same with previous transactions earlier, a prompt from Metamask asks you to confirm the transaction.
Now that we’ve collected the fees, we then ‘Remove Liquidity’.
It then asks you if you want to remove only a portion or the whole position.
Once you’ve set your desired percentage, you can now click ‘Remove’.
Confirm transaction on Metamask.
Liquidity Position now closed.
You have made your first ever liquidity position on Uniswap V3.
Now that we’ve gone through all those steps, we can now test and experiment on other pools, other pairs, on a larger amount.
It is only complicated the first time you try. Believe me, I had to try this sequence three times to really grasp and get familiarized with the process. 😅
This is definitely a good option for those investors who don’t have enough time on their hands to day-trade but still want to invest in crypto.
If you have some questions or experience you’d like to share about Uniswap V3 Liquidity Pools, fell free to drop them in the comments section!
Happy investing! 🚀🚀🚀
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Elisa is our Head of Market Analysis at Rocket Crypto X
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