Half of Users Providing Liquidity on Uniswap V3 Are Suffering Negative Returns, New Study Finds
- An evaluation of impermanent loss in V3 discovered that roughly half of customers offering liquidity to the protocol are dropping cash when in comparison with HODLing.
- While Uniswap V3 generates the very best buying and selling charges of any DeFi protocol, impermanent loss dominated the charge earnings in over 80% of the swimming pools analyzed.
- Uniswap swimming pools included within the evaluation generated $199m in buying and selling charges and incurred $260m in impermanent loss, leaving a web loss of over $60m and 49.5% of LPs with adverse returns.
- The proportion of customers struggling adverse returns was as excessive as 70% in sure swimming pools; the proportions of customers struggling losses in key swimming pools embody MATIC/ETH (51%), COMP/ETH (59%), USDC/ETH (62%), COMP/ETH (59%) and (74%).
- The research additionally discovered no statistical proof that customers who alter their positions extra continuously carried out higher than customers who don’t, calling into query the broadly held perception that “active” LPs outperform “passive” LPs in Uniswap V3.
- To the opposite, the research discovered that past the 1 hour horizon LPs who staked for longer durations on common misplaced lower than those that had been staking just for quick durations.
Automated Market Makers (AMMs) have developed into the cornerstone of decentralized finance. Users have staked over $30 billion in AMMs throughout each main blockchain, producing billions in buying and selling charge income per yr. However, the monetary dangers related to AMMs stay poorly understood. Often ignored is the price of offering liquidity, generally known as impermanent loss.
A brand new research peels again the curtain on liquidity supplier earnings in AMMs at the moment. Analysis of 17,000+ wallets offering liquidity in Uniswap V3 reveals that roughly half of customers are struggling adverse returns on their staked capital as a consequence of impermanent loss.
While Uniswap V3 generates the very best buying and selling charges of any DeFi protocol, impermanent loss completely worn out charge earnings in over 80% of the swimming pools analyzed.
Only 3 of the 17 swimming pools analyzed earned charges that exceeded the impermanent loss.
Seventeen swimming pools had been analyzed within the research, accounting for 43% of Uniswap V3’s TVL. Pools had been chosen by measurement (swimming pools with lower than $10m TVL had been excluded), knowledge availability and token composition (like-kind and stable-to-stable swimming pools like renBTC/WBTC and USDC/DAI had been excluded).
Analyzed swimming pools generated a formidable $108.5b in buying and selling quantity and $199m in charge earnings from May fifth to September twentieth, 2021. However, throughout the identical interval, the swimming pools incurred over $260m in impermanent loss, leaving 49.5% of LPs with adverse returns.
In sure swimming pools, the proportion of customers struggling adverse returns was as excessive as 55-70%, together with MATIC/ETH (51%), COMP/ETH (59%), USDC/ETH (62%), COMP/ETH (59%) and MKR/ETH (74%).
On the precise, the proportion of wallets in every of the analyzed swimming pools incomes cash (inexperienced) vs. dropping cash (pink). On the left, the imply returns of losers (pink) and winners (inexperienced).
After discovering that the typical Uniswap V3 liquidity supplier underperforms a primary purchase and maintain technique, researchers sought to know whether or not sure teams persistently outperform others. In explicit, the research examined whether or not “active” customers who alter their positions extra continuously carried out higher than “passive” customers who don’t.
To achieve this, the length of pool positions was in comparison with the earnings earned for his or her LPs. The assumption was that, on common, shorter-term positions seemingly belong to extra energetic LPs. Those who go into the market and depart it shortly thereafter are prone to be implementing a premeditated technique and may be thought-about extra refined, or at the very least extra energetic, than those that keep longer. By analyzing the profitability of positions by length, researchers sought to check the speculation that energetic LPs carry out higher. However, no correlation may very well be discovered between shorter-term positions and better earnings. Across all teams, impermanent loss outpaced charges earned, calling into query the broadly held perception that energetic LPs outperform passive ones.
IL vs. charges measured by place length.
The solely group that persistently made cash when in comparison with merely HODLing had been just-in-time or “JIT” liquidity suppliers who present liquidity for a single block to soak up charges from upcoming trades, then immediately take away their place. This liquidity was offered intra-block and it didn’t trigger any significant IL, leaving 100% of the charges as revenue. All different segments have an IL/charges ratio that’s better than 1, indicating a web loss of worth. The higher sure on this ratio was as excessive as 1.8, that means that liquidity suppliers incurred $180 in IL for each $100 value of charges, leaving a web loss of $80.
“Our core finding is that overall, and for almost all analyzed pools, impermanent loss surpasses the fees earned during this period,”
the research’s authors concluded.
“Importantly, this conclusion appears broadly applicable; we have collected evidence that suggests both inexperienced retail users and sophisticated professionals struggle to turn a profit under this model.”
Learn extra about impermanent loss.
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