FAQ - Uniswap v3 LP
This FAQ aims to give you a basic understanding on how Uniswap v3 Liquidity works

Uniswap v2

  • LP token representing your pool share
  • Single type of LP fee across all pairs (0.3% of each trade goes to Liquidity Providers)
  • LP is provided to the whole spectrum of price (0~infinity)
  • 50% of token A and 50% of token B is required

Uniswap v2 Add Liquidity UI

Uniswap v3

  • NFT is minted (when providing liquidity) and represents your pool share
  • LP fees can be selected from 4 different models depending on :
    • Stable coins - 0.01 or 0.05%
    • Standard pairs - 0.3%
    • Exotic/risky pairs - 1%
  • Liquidity can be provided for any range of price, defined by the liquidity provider
  • % of token A and B depends on price range selected
  • If out of price range is selected, either token A or B can be provided instead of a pair
  • Liquidity providers can provide multiple LP on the same pair using various price ranges.

Uniswap v3 Add Liquidity UI

Uniswap v2 vs v3

  • Both v2 and v3 are subject to impermanent loss, though the tighter the price range you provide liquidity to in v3 is, the higher you expose yourself to the risk of impermanent loss.
  • Both v2 and v3 pools can be "drained" (i.e. ETH/BNB/USDC/etc. drained) even is LP is locked, by selling a large amount of (unlocked) tokens
  • You can have multiple liquidity positions on v3 for the same pair
  • You can submit only 1 asset in v3 if you select a range outside of current price, however impermanent loss will still occur when reaching the entry of that range: typically you will have less of the asset you have supplied and receive some of the other asset in the pool. This can also be considered as sell order if your price range is very tight.

References (Uniswap)