osETH Liquidity: osETH-USDC on Uniswap V3

5 min readDec 8, 2023

The osETH-USDC pool on Uniswap V3 is the final piece to the osETH liquidity strategy pursued by the StakeWise DAO. This pool is designed to efficiently handle large volumes of arbitrage trades between ETH, osETH and USDC while utilizing relatively little capital.

The volatile nature of ETH (osETH) trading against USDC and the expectedly small size of this pool mean that the osETH-USDC farm is a rather niche opportunity. LPs should expect to earn trading fees, staking rewards on their osETH position, and SWISE incentives (distributed through Merkl).

For those unfamiliar with the Uniswap V3 DEX, check out the “Uniswap V3 Explained section” below to learn more about its pricing mechanics and methods of rewards distribution. For those who want to jump straight in, follow the step-by-step guide below.

!Note! We expect to introduce the option to deposit liquidity through an automated liquidity management app that optimizes positions in Uniswap V3 according to market volatility (ETA early 2024). Bear this in mind when deciding when to deposit your liquidity.

Step-by-step guide to deploying liquidity on Uniswap V3

  1. Navigate to the osETH-USDC pool page and press Add Liquidity.
  2. Select the price range in which you want to provide liquidity by either dragging the sliders around the current price, or inserting the price range manually. If you want to specify the range manually, it is best to first switch the toggle to osETH. Note that the tighter your range is concentrated around the osETH price, the more SWISE rewards and trading fees you will earn.
  3. Enter the amount of assets you would like to deposit and confirm the transaction. The proportion of assets you will need to add is determined by the price range you chose and can vary widely.
  4. Once your transaction is confirmed, you will start earning trading fees, staking rewards on osETH, and SWISE incentives. There is no need to stake your LP tokens to receive SWISE — you can simply claim them from Merkl as often as you want.

We have also prepared a visual guide here: https://x.com/stakewise_io/status/1733139690818064577?s=20

Uniswap V3 explained

Uniswap V3 is a decentralized exchange that processes roughly $800M of trading volume per day and is considered to be one of the most popular decentralized exchanges on Ethereum. It is best known for the ability to provide concentrated liquidity i.e. choose a price range in which your liquidity will be available for traders.

Concentrated liquidity can be ca 2000x more efficient than the original Uniswap invariant x*y=k. This means that Uniswap V3 can process large trading volume with little TVL, boosting trading fees for LPs and making liquidity more efficient for protocols that attract liquidity for their tokens.

Incentives mechanism

Unlike Balancer and Curve, Uniswap V3 does not feature a native mechanism for distributing incentives to liquidity providers. Instead, products like Merkl are built on top of Uniswap V3 to allow the distribution of incentives to LPs in a transparent and efficient manner.

Every protocol whose token is trading on Uniswap V3 has the option to allocate incentives to its LPs through Merkl. In the case of StakeWise, the osETH-USDC pool is incentivized with the SWISE token that LPs earn proportionately to how much liquidity they possess and how concentrated it is around the current price. The more sizeable their position and the closer the liquidity range is to the current price, the more LPs will earn in this farm (compared to the less concentrated positions).

Pricing formula

The pricing formula of Uniswap V3 follows the infamous Uniswap invariant where x*y=k, yet allows LPs to concentrate liquidity only on the portion of the pricing curve if they so desire. Hence, every concentrated position effectively follows its own constant product function (xy=k) within the limits of its range.

For more information about Uniswap V3’s pricing formula, take a look at its docs.

The osETH-USDC pool incentivized by the StakeWise DAO features a 0.05% trading fee and is deemed to be relatively exotic due to the volatility of ETH (which is represented by osETH tokens) against USDC. It is expected that arbitrage traders will utilize the pool to extract inefficiencies in the pricing of ETH, osETH and USDC relative to each other, being able to conduct arbitrage trades in both directions.

What to think about as an LP (Risks / Rewards)

As liquidity is deployed on Uniswap V3, there are no extra considerations other than whether you are happy taking price exposure to osETH against USDC, alongside the associated smart contract risks of StakeWise and Uniswap. The proportion in which assets are being traded in the liquidity pool will frequently change due to the addition and removal of concentrated liquidity positions (that may overlap with others or vary significantly) and trading flows through the pool. Note there is no option to add or remove single-sided liquidity as assets will always need to be added/removed in the proportion dictated by Uniswap (given the chosen price range).

Effective arbitrage for osETH will ensure that the token remains competitive on the DEX market and does not experience deviations from its peg. Still, liquidity crunches and market crises may affect the price of osETH on the secondary market, especially until redemptions are switched on in early 2024.

In addition, concentrated liquidity is known to enhance the possibility of impermanent loss by orders of magnitude. In practice, this means that the more concentrated your position is, the more of your osETH will be sold amid a relatively small rise in price, and the more osETH will be bought amid a small dip. Remember: the more concentrated your liquidity, the smaller the effect from ETH price swings on the value of your position.

Finally, note that the distribution of SWISE rewards for this pool happens through Merkl, and does not require locking your Uniswap LP tokens to participate. Hence, LPs are not exposed to the extra risk of Merkl when providing liquidity and earning rewards.

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