Swap fees are only allocated to liquidity positions within the current price range, and LP fees need to be claimed manually.
v3 supports multiple tiered pool fee rates (e.g., 0.05%, 0.3%, 1%) where the concentrated liquidity mechanism addresses liquidity fragmentation and slippage issues, allowing different assets to select the optimal fee rate pool.
v3/v4 introduced a protocol fee-sharing mechanism adjustable by governance, enhancing flexibility and sustainability.
Example process: How users can add LP on Uniswap to earn fee income
Choose trading pairs and liquidity pools
Users select a trading pair (e.g., USDC/ETH) on the Uniswap frontend and choose the appropriate fee tier (e.g., 0.05% for stablecoin pairs, 0.3% for mainstream coin pairs).
Add liquidity
Users decide the range of liquidity they wish to provide based on the current price range of the pool (e.g., ETH/USDC price range of 2,500) and deposit equivalent amounts of both assets (e.g., 1 ETH + 2,200 USDC).
User signs and submits a transaction to become an LP in this range and receives an NFT position certificate.
Earn fee income
As long as the market price is within the range set by the user, the user's liquidity will be used to facilitate trades, and each swap will proportionally distribute the fees (e.g., 0.3%).
For example, if there is a total trading volume of $1 million within this range in a week and the user occupies 10% of the liquidity in this range, they can earn $1 million × 0.3% × 10% = $300 in fees.
Claim earnings and exit
Users can view the accumulated fees at any time on the Uniswap frontend and claim them manually.
When users no longer wish to continue being an LP, they can remove their liquidity at any time and redeem their principal and any unclaimed fees.
Additional notes:
Earnings primarily come from the distribution of trading fees, which is positively correlated with pool activity and the proportion of one's liquidity.
It is essential to note the risk of 'impermanent loss', which means that during substantial price fluctuations, the final value of redeemed assets may be lower than merely holding the tokens.
Users can flexibly choose ranges and fee tiers based on different asset attributes and market conditions to optimize returns and risks.
Swap fees
Swap fees are proportionally distributed to all liquidity within the current price range (in-range). When the spot price moves outside a position's price range, that portion of liquidity will no longer be active and will not generate any fees. If the spot price reverses and re-enters that position's price range, the liquidity of that position will be reactivated and start earning fees.
Unlike previous versions of Uniswap, swap fees will not be automatically reinvested. Instead, these fees will be collected separately from the liquidity pool, and LPs need to manually redeem them when they wish to claim.
Liquidity pool fee tiers
Uniswap v3 introduced multiple distinct liquidity pools for each pair of tokens, each with different swap fees. Liquidity providers can create pools at three initial fee rates: 0.05%, 0.30%, and 1%. More fee tiers can be added through UNI governance, such as the 0.01% rate added via a governance proposal in December 2021 (see execution details here).
In the past, splitting trading pairs into multiple pools led to liquidity fragmentation, making it difficult to realize. While differing fees can better incentivize LPs, liquidity dispersion usually leads to a worse overall experience for traders (due to reduced liquidity in single pools leading to increased slippage).
The introduction of concentrated liquidity decouples total liquidity from price impact. After resolving the price impact issue, splitting trading pairs into multiple pools becomes a viable option, helping to provide better pool choices for assets that are not suited for the 0.30% rate.
How to choose the appropriate pool fee rate
Different types of assets will naturally cluster into the fee tiers that suit them best, maximizing alignment of incentives for LPs and traders.
Low-volatility assets (such as stablecoins) are likely to concentrate in the lowest fee pools, as LPs hold these assets with minimal price risk, and traders also seek to achieve exchange rates as close to 1:1 as possible.
Similarly, more volatile or less frequently traded assets tend to choose higher fee pools, as LPs would prefer to be compensated with higher fees for the risk taken while holding these assets.
Protocol fees
Both Uniswap v3 and v4 have introduced a protocol fee mechanism that can be activated through UNI governance. Compared to v2, this fee structure is more flexible, allowing governance to adjust the proportion of swap fees allocated to the protocol. For detailed information about protocol fees, please refer to the v3 and v4 whitepapers.
Note: in-range liquidity refers to all liquidity positions that cover both sides of the current spot price.
