Earn Fees for Trading on Uniswap v3: How To Make Limit Orders

Key points to remember

  • Limit orders are a type of transaction where users set a certain price at which they choose to exchange one token for another.
  • Due to the new concentrated liquidity feature in Uniswap v3, users can, with a little know-how, execute these limit orders on the decentralized exchange.
  • Limit orders not only avoid fees, they actually incur fees for the trader.

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One of DeFi’s best-kept secrets is a precise technique that allows traders to earn fees on their trade rather than paying them. To do this, head to the latest version of Uniswap to learn how to place limit orders.

Concentrated liquidity

Uniswap is constantly at the forefront of innovation for decentralized exchanges (DEX). The second version of the project was one of the catalysts for the explosion of the DeFi sector in 2020. On April 1, Uniswap v3 introduced a revolutionary concept in the Automated Market Maker (AMM) system, concentrated liquidity. To understand how it works, let’s see how AMMs generally work.

Users provide liquidity to a pool in equal proportions. Once another user trades with the pool, they add one of the two tokens in the cash pool by changing the price slightly, as there is now more of one token than the other. Decentralized exchange, however, will still consider the two assets in the pool to be in proportions of equal value. The result? The price of the asset being sold will drop slightly while the price of the other will increase slightly.

When a user trades with a cash pool, the pool adjusts its price and the user receives the other token. But there is a third player in these trades, the liquidity provider, or as it is called in traditional finance: the market maker.

In traditional finance, market makers are large companies like Citadel. Market makers offer assets at two prices, one for sellers and one for buyers. He takes advantage of the difference between these two numbers. The real deal with market makers is not the price; it’s volume. The higher the volume, the higher the profit.

In DeFi, anyone can be a market maker and provide liquidity. On Uniswap v3, users can even decide to provide liquidity to a certain part of the price curve, which allows them to earn more fees as long as the asset’s price stays within the range they have selected. . For example, setting a range price for ETH / USDC between 1500-2500USDC / ETH will incur more fees than providing liquidity to the entire range as long as the price of ETH remains between 1500 and 2500USDC.

Visualization of the concentrated liquidity functionality of the Uniswap v3 white paper.

Limit orders on decentralized exchanges

There is a catch in providing liquidity within a certain range. If the price of ETH falls below 1500USDC, the aforementioned user will only stay with ETH. This is not a bug, this is how automated market making is designed. If you provide liquidity at a certain range, the protocol will use this to swap one of your assets with the other up to the minimum price at which you have decided to provide liquidity – at which point all of the stronger assets will have been traded with the weaker one. You can find more details about this interaction in this Uniswap v3 explainer.

You can use this mechanism to create limit orders on Uniswap v3. While market orders immediately trade your funds with the pool, limit orders wait until a certain price is reached to trade your tokens.

This has three major advantages. Firstly, trading assets on Uniswap can incur fees ranging from 0.05% to 1%, which you don’t have to pay if you are providing cash. Second, you can earn fees if your cash is used by others to trade. Third, you can choose the exact price at which you want to redeem your tokens.

To do this, you need to head to Uniswap v3 and add liquidity to a pool. Then you need to select a price that is higher than the current price of the pool and provide the asset that you want to trade at that higher price.

Limited order example on Uniswap v3.

As you can see, the current market price of Ethereum is 2363USDC on Uniswap. Because I have set the liquidity provision range above the current price, Uniswap v3 will automatically turn my ETH into USDC once we hit the minimum price I set, 2401USDC. This is a complex maneuver, but it can help you get much better prices on your DeFi transactions, and it’s completely safe. Have a good negotiation!

Disclaimer: The author held ETH at the time of writing.

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