50% of Uniswap V3 liquidity providers suffer negative returns, study finds

By: Daniela Kirova
Daniela Kirova
Daniela was born in Bulgaria, grew up in Chicago, and then moved to Michigan to attend the University of… read more.
on Nov 18, 2021
  • Losses dominated more than four-fifths of the pools analyzed
  • Providers who staked for longer than one hour lost less than those who staked for short periods
  • Group of JIT liquidity providers get all the fees as profit because they provide liquidity intra-block

Around half of users providing liquidity to Uniswap (UNI/USD) V3 protocol are losing money when compared to HODLing, an analysis of impermanent loss showed. In more than four-fifths of the pools analyzed, this loss was dominant even though Uniswap V3 generates the highest trading fees of any DeFi protocol, Invezz learned from a press release.

Pools’ net loss exceeds $60M

Uniswap pools incurred $260 million in impermanent loss and generated $199 million in trading fees, leaving a net loss of more than $60 million and negative returns for 49.5% of liquidity providers. In some pools, up to three-quarters of users suffered losses. The proportions of users suffering losses in key pools were as follows:

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Do active LPs outperform passive ones in Uniswap V3?

The study questioned the popular belief that “active” LPs outperform “passive” LPs in Uniswap V3. In fact, their findings were that LPs who staked for longer than one hour lost less than those who staked for short periods.

Position duration and profit comparison

The authors compared the duration of pool positions to the profit liquidity providers earned, assuming that shorter-term positions were more likely to belong to more active LPs. In other words, providers who left the market soon after going into it were more prone to use a premeditated strategy and could be considered more active than those who stayed longer.

The winner  

The study found no correlation between higher profit and shorter-term positions. Impermanent loss was greater than the fees earned in each of the groups studied. JIT (just in time) liquidity providers were the only ones that always made money when compared to simply hodling.

These LPs remove their position immediately after providing liquidity for a single block to absorb fees from upcoming trades. They get all the fees as profit because they provide this liquidity intra-block, leaving no impermanent loss.

The study’s authors summarized:

Overall and for almost all analyzed pools, impermanent loss surpasses the fees earned during this period. 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.

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