[Ethereum] How much liquidity to provide to Uniswap

decentralized-exchangeerc-20uniswap

So you deployed your brand new ERC20 token to Uniswap. I understand you need to provide liquidity for your token pair in Uniswap so people can start buying your token. Now, what I'm trying to wrap my mind around with is if the liquidity you provided was sold off, would that mean your token cannot be bought anymore?

Best Answer

Whoever provides the liquidity has the option to take his share of the liquidity out of the pool, at any time they want. Liquidity is never "sold off" as such, since Uniswap price is based on a bonding price curve. So the trading price simply changes between trades, reflecting which asset of the pair is bought more and which sold.

There is also no "correct" amount of liquidity you need to provide. You can provide as little as you want, or as much as you want. Remember that anyone else can also provide liquidity. Also remember, that if you provide only very little liquidity, the price will change fast and people will most likely stop trading. So the more liquidity there is, the more stable the price.

Neither asset of the pair can ever be bought fully - there is always a little bit left. So, at least in theory, the pool will remain functional always, no matter what the asset ratio is and no matter how much liquidity there is.

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Uniswap V3: Create LP (ETH-ERC20 pair) using solidity

I'm assuming you refer to the official Uniswap V3 example here : https://docs.uniswap.org/sdk/guides/liquidity/adding and that your pool is initialized

Short answer: Uniswap handles the (un)wrapping.

Complete answer :

The main idea in adding liquidity is similar to how swaps are performed in V3:

start from a periphery (optional) "helper" (NonfungiblePositionManager.sol here), which is inheriting LiquidityManagement.sol (from periphery/base). This is where you can find the (internal) addLiquidity function which, after computing the amount (price for start and end tick and Struct packing) will...
...call the low-level-ish mint function on the pool itself. This function is quite short, and can be summarized as: take note of the current pool balances - call the callback - take note and comparing the new pool balances.

The actual token transfers are done in the callback, which must be implemented by the contract calling pool.mint (here, LiquidityManagement does it for you). The callback uses pay() (from base/peripheryPayment), where you can easily see the (un)wrapping mechanism (pay is used by the swap callback too).

if (token == WETH9 && address(this).balance >= value) {
        // pay with WETH9
        IWETH9(WETH9).deposit{value: value}(); // wrap only what is needed to pay
        IWETH9(WETH9).transfer(recipient, value);

Control schema:

 Periphery                Core
addLiquidity      --->  pool.mint
mintCallback&Pay  <---  
                  --->  pool.mint

Best Answer

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Uniswap V3: Create LP (ETH-ERC20 pair) using solidity

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