Customizable liquidity positions, along with single-sided asset provisioning, allow for a new style of swapping with automated market makers: the range order.
In typical order book markets, anyone can easily set a limit order: to buy or sell an asset at a specific predetermined price, allowing the order to be filled at an indeterminate time in the future.
With Uniswap V3, one can approximate a limit order by providing a single asset as liquidity within a specific range. Like traditional limit orders, range orders may be set with the expectation they will execute at some point in the future, with the target asset available for withdrawal after the spot price has crossed the full range of the order.
Unlike some markets where limit orders may incur fees, the range order maker generates fees while the order is filled. This is due to the range order technically being a form of liquidity provisioning rather than a typical swap.
Possibilities of Range orders
The nature of AMM design makes some styles of limit orders possible, while others cannot be replicated. The following are four examples of range orders and their traditional counterparts; the first two are possible, the second two are not.
One important distinction: range orders, unlike traditional limit orders, will be unfilled if the spot price crosses the given range and then reverses to recross in the opposite direction before the target asset is withdrawn. While you will be earning LP fees during this time, if the goal is to exit fully in the desired destination asset, you will need to keep an eye on the order and either manually remove your liquidity when the order has been filled or use a third party position manager service to withdraw on your behalf.
Take-Profit Orders
The current price of a DAI / ETH pool is 1,500 DAI / ETH. You would like to sell your ETH for DAI when the price of ETH reaches 1,600 DAI / ETH. This is possible, as the price space above the spot price is denominated in the higher valued asset, ETH. You can provide ETH at a price of 1,600 DAI / ETH and have the order filled when the spot price crosses your position.
Buy Limit Orders
The Current price of a DAI / ETH pool is 1,500 DAI / ETH. You expect that ETH will rebound after it drops to 1,000 at the next market downturn, so you would like to place a range order swapping DAI to ETH at the price of 1,000 DAI / ETH. This is possible, as the price space below the spot price is denominated in the lower-priced asset, DAI. You can provide DAI at the price of 1,000 DAI / ETH, which will be swapped for ETH when the spot price of ETH drops past 1,000 DAI / ETH.
As the above examples show, in Uniswap V3, the two paired assets in a given pool are separated above and below the spot price, with the higher price asset available above the spot price and the lower-priced asset below.
The following examples show limit order styles that are unable to be replicated due to the separation of assets in price space.
Buy Stop Orders
The current price of a DAI / ETH pool is 1,500 DAI / ETH. You expect the price of ETH to rocket up to 3,000 once it hits 2,000 DAI/ ETH, So you would like to place a range order from DAI to ETH at a price of 2,000 DAI/ETH. This is not possible as the price space above 1,500 DAI / ETH is denominated in ETH - and thus, you cannot provide the DAI necessary at your desired price to be swapped into ETH.
Stop-Loss Orders
The current price of a DAI / ETH pool is 1,500 DAI / ETH. You expect once the price of ETH drops to below 1,000, it will tank to 200. So you would like to place a range order from ETH to DAI at a price of 1,000. This is not possible as the price space below the spot price is denominated in DAI, and so you cannot allocate the ETH necessary at 1,000 to be swapped into DAI.
Fees
The fees due to your liquidity position will be denominated in both tokens of the given pair. In any of the above examples, after swapping ETH for DAI, or DAI for ETH, a small amount of both ETH and DAI will be due to your account as liquidity provisioning rewards.
Approaches to concentration when setting range orders are up to the user. Selecting a wider range may generate more fees if there is price churn within your range, at the cost of increasing the risk of having your order unfilled if the spot price reverses before completing your full range.
FAQs
The range you set determines how much liquidity you provide at different prices, and how much trading fees you earn. Thus, concentrated liquidity earns you more than full range. The higher the range the lower the fees you earn and the lower the range the more the fee.
How do you change the price range in Uniswap? ›
To change the price range of a position you must remove the liquidity position, then create a new position with the desired price range. To learn more about removing liquidity and creating a position, see the following: How to remove a liquidity position from Uniswap v3.
What is full range in Uni v3? ›
Full Range in Uniswap v3
This means that you can add liquidity to a specific price range, which may result in greater fees earned and a position that is closer to the current price.
What is a limit order in DeFi? ›
Let's dive into how limit orders work in DeFi. With regular swaps you just take the market price — like with market orders. Meanwhile, with limit orders you specify the limit price, i.e., the price you want to buy or sell. If you expect the price to move, you can set limit orders and wait for them to fill.
How risky are liquidity pools? ›
Depositing your cryptoassets into a liquidity pool comes with risks. The most common risks are from DApp developers, smart contracts, and market volatility. DApp developers could steal deposited assets or squander them. Smart contracts might have flaws or exploits that lock or allow funds to be stolen.
Do liquidity pools make money? ›
Liquidity providers get incentives
Liquidity pools pave a way for liquidity providers to earn interest on their digital assets. By locking their tokens into a smart contract, users can earn a portion of the fees that are generated from trading activity in the pool.
What is a range order Uniswap? ›
Range Orders can be created by minting an LP position with highly concentrated liquidity outside of the current price range for a pool. Because the position is outside of the active range, it is composed entirely of one asset.
How do I avoid high fees on Uniswap? ›
You can try to execute your transactions during periods of lower network activity to reduce the fees. Additionally, consider using layer 2 solutions or alternative networks that offer lower transaction costs. It's also helpful to adjust the gas fees manually on platforms like Uniswap to optimize transaction costs.
Why does it cost so much to swap on Uniswap? ›
Swapping fees are immediately deposited into liquidity reserves. This increases the value of liquidity tokens, functioning as a payout to all liquidity providers proportional to their share of the pool. Fees are collected by burning liquidity tokens to remove a proportional share of the underlying reserves.
How does uni V3 work? ›
Key Takeaways: Uniswap v3 is a decentralized exchange protocol that operates on the Ethereum blockchain. Uniswap v3 utilizes the concept of automated market makers (AMMs) to provide users with the ability to trade cryptocurrencies directly from their wallets.
Third-Class Honours (Third or 3rd) (40-50%)
What is uni V3 pos? ›
What is Uniswap V3 Positions? Uniswap V3 Positions (UNI-V3-POS) is an NFT collection. Uniswap V3 Positions (UNI-V3-POS) price floor today is $0.575676, with a 24 hour sales volume of 0 ETH. As of today, there is a total of 380,473 NFTs minted, held by 137,680 unique owners, and has a total market cap of $219,029.
Why are limit orders risky? ›
Limit order risks
Risk of no execution – Limit orders allow you to seek a specific price or better, but they do not guarantee that an execution will occur because the price may never reach your limit price.
What are the two types of limit orders? ›
Limit Order.
A buy limit order can be executed only at or below the limit price; a sell limit order can be executed only at or above the limit price. This means you're guaranteed to get your limit price or a better price if your order is executed. However, there's a chance your order doesn't get executed at all.
Why use a limit order? ›
A limit order guarantees that an order is filled at or better than a specific price level. A limit order is not guaranteed to be filled, however. Limit orders control execution price but can result in missed opportunities in fast-moving market conditions.
What is the range of the liquidity score? ›
Available for Euro, Sterling and Dollar-denominated bond markets, our scoring method covers nearly 36,000 bonds daily, with scores ranging from 10—meaning, the highest level of liquidity—down to 1.
What does a high liquidity pool mean? ›
Benefits of liquidity pools
For traders, the benefits of increased liquidity include reduced slippage and faster transactions. In illiquid markets, trades can be subject to slippage, where an order can't be filled at a single price in its entirety.
How do you calculate liquidity pool? ›
Liquidity pool price setting
The formula that gives the exact price is quite simple (which is part of what makes liquidity pools so elegant) and is called the “constant product” formula: X * Y = K.
What is the composition of a liquidity pool? ›
Each liquidity pool will have a specific composition of assets (usually 2-3 specific tokens) where the amount of Token A + Token B = 'LP AB', and liquidity providers must deposit equal proportions (in market value) of each token to enter the pool.
