Choosing a Uniswap V3 Price Range: The Fundamentals

Part of the magic of Uniswap V1 was that anyone could be a market maker, providing liquidity in a few easy clicks. As we’ve progressed to V2 and now V3, Uniswap is still as permissionless as ever. However, in exchange for a major step-up in expressivity and efficiency, LPing on Uniswap is not as accessible as it once was. That’s okay. As the space moves forward and DeFi grows more sophisticated, the old will be pushed out by the new and progressively more powerful tools will predominate.


In light of the trend towards complexity, one of the main goals for xToken Terminal is to make the LP and liquidity mining experience as easy as it was for V1 and V2. We’ve bridged the divide and even improved UX in some cases. However, we feel there is still quite a bit of education to do with respect to **the key difference between LPing on V1/V2 and V3: setting a price range**.

This post will relate specifically to setting a Uniswap V3 price range on xToken Terminal. Terminal is our new end-to-end platform where projects can launch a highly customizable Uniswap V3 liquidity mining program in a matter of minutes, no dev work required.


[Active price discussion around setting a Uni V3 price range](

# Setting a Price Range

Here are our high level recommendations for setting a price range for an LM program. The rest of the piece explains how we arrived at our reasoning.


[Framework for setting price range](

## Volatile Pairs

The volatile category applies to most pairs, including your classic “Pool 2,” where a project pairs ETH or a stablecoin against their native token.

**In our conversations with projects in the space, many seem almost too eager to take advantage of Uniswap V3’s concentrated liquidity functionality**. This is understandable given that concentrated liquidity is the major innovation of Uni V3, allowing traders to get better prices on their swaps for the same amount of total liquidity.

However, this approach fails to recognize the risk and the added costs of concentrated liquidity.

First, the more concentrated the liquidity, the greater the magnitude of impermanent loss. For a concentrated position on a low volume pair, it’s very unlikely that the gains from trading fees will exceed the *loss* from impermanent loss.

Second, if you’re concentrating liquidity on a volatile pair, you run the risk of your position falling out of range. If your position falls out of range, you’ll need to rebalance. Rebalancing costs you in swap fees, slippage and gas, not to mention mental overhead.

>Making matters worse…for liquidity mining programs on assets without any external liquidity — meaning the LM pool holds all or most of the token’s liquidity — it may actually be impossible to rebalance. To “rebalance” is to change the mix of assets in the pool, but when you’re already holding all the assets in the pool, there is no liquidity to rebalance against!

**For these two key reasons, it’s likely that setting a full range is the dominant option for low and mid volume volatile pairs**. For efficiency maximizooors, pulling the price range in a bit on each end may satisfy the urge — perhaps enough to cover a 90% price decrease and a 800% increase.

On higher volume pairs, the calculus becomes a little more interesting. **By “high volume” we mean the point at which the yield from trading fees exceeds the costs of impermanent loss and rebalancing**.

For these cases, pool sponsors might want to concentrate the range somewhat or, alternatively, consider a multi-pool approach. Terminal makes it really easy to spin up multiple incentive programs, where a project could split rewards between a full range pool and a more concentrated range pool. This is the best of both worlds to some extent in that a project is now facilitating a more stable base of liquidity as well as a deeper reserve of liquidity around the current price. Additionally, this has the advantage of letting LPs express a market outlook and risk preference.

## Pegged Pairs

Before the launch of Uniswap V3, Curve was the only competitive option for the trading of pegged assets. Putting aside the dynamic, often impenetrable “Curve Wars,” where layer upon layer of incentives compete for liquidity and inflationary rewards, Uniswap — thanks to concentrated liquidity — is now *as* potent an option for traders and LPs on pegged pairs.

*Note: when we say “pegged pairs”, we mean assets that are unlikely to materially deviate in price, e.g., USDC-DAI or sETH-WETH.*


[Some of the fine stablecoins we’ve come to know and love](

Notably, pegged pairs all but eliminate the risk of impermanent loss. Of course, if the peg breaks, that’s a different story. However, in the normal course of things, LPing on a pegged pair should result in minimal if any IL.

For this reason, **pool sponsors should be very comfortable setting a concentrated range on a Uni V3 LM program**, perhaps as narrow as a 0.1% price deviation on each side of the pegged price (and possibly even narrower). For lower volume pairs, sponsors might want to leave a little more slack on each side, for an assortment of reasons we can save for another blog post.

## Anchored Pairs

We’re using the term “anchored” to describe asset pairs that move predictably and steadily in price relative to one another. For example, the staked version of our token — xXTK — steadily gains on the unstaked version — XTK — as fee revenue and inflationary rewards accrue to the staking contract. MATIC and stMATIC from Lido is another great example. If stMATIC returns 10% annually relative to MATIC, we could deploy an LM program on a narrow, concentrated range of liquidity, adding 10% to the upside as a buffer. This position would remain in range for a full year maintaining a high degree of capital efficiency — without any rebalance required.

**Anchored pairs allow for perhaps the most elegant application of concentrated liquidity**, as LM pool sponsors can set a highly concentrated range and predict with relative certainty how long price will remain within range. For low volume pools, you might want to leave a bit of extra margin, but the strategy will be roughly the same across the board.

# A Note on Fee Tiers

Choosing a fee tier for your LM incentive is somewhat less complicated but is still an essential element of a successful program. We believe that many low and mid volume projects opt for the 30bps (bps = basis points; 30bps = 0.3%) tier to their detriment, when 100bps would be more appropriate. LPs need to be properly compensated for the volatility risk they are taking on. Some projects may push back on the 1% sticker price for a single swap, but the fact is that daily gains/losses of 10% or more are common in crypto and the 1% fee is ultimately rather small for low/mid volume tokens.

For pegged and anchored pairs, the process for choosing the proper fee tier is fairly well understood. For most pegged pairs, 5bps works well. And for anchored pairs, it’ll usually be a choice between 5bps or 30bps.


# Learn More

Join us in Discord or follow us on Twitter to learn more about xToken Terminal. Terminal is the capital markets platform for Web3, providing projects with seamless and permissionless access to fundamental DeFi primitives. Our first “app” on Terminal — Mining — allows projects deploy a highly customizable Uniswap V3 liquidity mining program in a matter of minutes, no dev work required. More apps coming soon!

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18 thoughts on “Choosing a Uniswap V3 Price Range: The Fundamentals”

  1. Thanks xtoken for its exploration and efforts in the development of the blockchain industry ,and wishes to all the interests of the development of the industry.

  2. The xtoken Terminal liquidity program looks promising and easy to access by any user. Thanks for sharing the elaborative detail

  3. pour ma part le xtoken a beaucoup d’avenir .le projet est très intéressant , surtout sur uniswap V3 .

    sans compté les paires ancrées qui sont un avantage pour avoir plus ou moins une prevision du prix .

  4. Do you have some good projects for gaming? I am really tired of those difficult projects where you need to invest, I just wanna relax

  5. A piece of advice, try running LPs on networks that have just released DEXs with liquidity pools, I can recommend Hedera since they’ll be getting these protocols real soon, the Hbar Foundation has made sure to rapidly finance this, since they know how much migration things like LPs can bring, everybody wins.

  6. Thanks for the extensive write-up, it’s a nice in-depth write up on everything on LP’ing and LM’ing on Uniswap V3.


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