Uniswap V3 Guide

Uniswap V3 Guide

When to use this skill

Use when the user asks about:

• How Uniswap V3 works
• Providing liquidity on Uniswap V3
• Choosing fee tiers on Uniswap
• Setting price ranges for concentrated liquidity
• Managing or adjusting an existing Uniswap V3 position
• Comparing Uniswap V3 to other DEXs

Protocol Knowledge

1. Uniswap V3 Core Concepts

Key innovations over V2:

• Concentrated liquidity: LPs provide liquidity within a custom price range instead of across the entire curve (0 to infinity)
• Capital efficiency: A narrow range provides the same depth as a much larger V2 position — up to 4000x more efficient
• Multiple fee tiers: 0.01%, 0.05%, 0.3%, 1% — different tiers for different pair types
• NFT positions: Each LP position is unique (specific range, fee tier) — represented as an NFT, not fungible ERC-20 LP tokens
• Active management: Positions earn fees only when price is within range — requires monitoring

2. Fee Tier Selection

Match fee tier to pair characteristics:

Check which fee tier has the most TVL for the pair — that's usually the primary trading venue.

3. Range Selection Strategy

Choosing the right price range is the most critical decision:

Wide range (±30-50% from current price):

• Lower capital efficiency but less active management
• Lower risk of price going out of range
• Suitable for volatile pairs or passive LPs
• Similar fee earnings to a smaller V2 position

Medium range (±10-20% from current price):

• Balanced capital efficiency and management effort
• Good for pairs with moderate daily volatility
• Likely needs adjustment every 1-4 weeks

Narrow range (±2-5% from current price):

• Maximum capital efficiency — earn maximum fees per dollar deposited
• Very high impermanent loss if price moves out of range
• Requires daily or even hourly monitoring
• Best for stable pairs or professional market makers

Range calibration method:

1. Pull 30-day price history for the pair
2. Calculate the standard deviation of daily returns
3. Set range to approximately ±2 standard deviations for moderate confidence
4. Widen range if you want less management, narrow if you want more efficiency

4. Position Management

Ongoing LP management tasks:

• Monitor range: If price is near the edge of your range, decide whether to adjust
• Collect fees: Fees accrue inside the position — collect periodically (costs gas)
• Rebalance: If price exits range, the position is 100% in one token and earns no fees. Options:
  • Wait for price to return to range
  • Remove liquidity and create a new position centered on current price
  • Factor in gas costs — sometimes waiting is cheaper than rebalancing
• Compound earnings: Periodically add collected fees back to the position

5. Impermanent Loss in V3

IL is amplified in concentrated positions:

• IL scales inversely with range width
• A position with ±5% range has roughly 10x the IL of a full-range position at the same price move
• When price exits the range entirely, you're left with 100% of the depreciating token
• For stable pairs with narrow ranges, IL is minimal as long as the peg holds

6. Gas Cost Awareness

On Ethereum mainnet:

• Creating a position: ~300K-500K gas
• Adding liquidity: ~200K-400K gas
• Removing liquidity: ~200K-300K gas
• Collecting fees: ~100K-150K gas
• Swapping: ~150K-250K gas

Consider L2 deployments (Arbitrum, Optimism, Base, Polygon) for smaller positions where mainnet gas would eat into returns.

7. Output Format

When advising on a Uniswap V3 position:

• Pair: Token pair and chain
• Fee tier: Recommended tier with reasoning
• Price range: Lower and upper bounds with rationale
• Capital efficiency: Multiplier vs full-range
• Expected fee APR: Based on current volume and position concentration
• IL risk: Estimated IL at ±10%, ±25% price movement
• Management frequency: How often to check/adjust
• Gas budget: Estimated costs for position management
• Alternative: Whether a V2-style position or different DEX might be simpler