Half of Uniswap V3 Liquidity Providers Underperform Holding: Bancor Study

Key Takeaways

  • According to a brand new research, roughly half of Uniswap liquidity suppliers underperformed a primary buy-and-hold technique.
  • In one pool, the quantity of liquidity suppliers struggling damaging returns was as excessive as 74%.
  • The research raises questions in regards to the efficacy of fixed function-based decentralized exchanges.

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A Bancor-backed research has discovered that as many as half of Uniswap V3 liquidity suppliers are struggling damaging returns. 

Study Investigates Uniswap Liquidity Provision

Liquidity suppliers on decentralized exchanges could also be getting a foul deal regardless of excessive yield charges.  

A new study performed in collaboration between Topaze Blue and Bancor has discovered that roughly half of the liquidity suppliers on Uniswap V3 yielded damaging returns in comparison with simply holding belongings. Bancor was Ethereum’s earliest automated market maker. It’s a competitor to Uniswap, one of the DeFi ecosystem’s hottest decentralized exchanges. Topaze Blue, in the meantime, is a boutique advisory agency specializing within the crypto and fintech sectors. 

The research analyzed greater than 17,000 wallets offering liquidity throughout 17 Uniswap V3 swimming pools, which accounted for 43% of the alternate’s whole worth locked. It discovered that, whereas the swimming pools generated $199 million in payment earnings in the course of the pattern interval of 5 months, they incurred over $260 million in impermanent loss, leaving 49.5% of the liquidity suppliers with damaging returns. 

Impermanent loss describes the distinction in worth between depositing belongings in twin token liquidity swimming pools or just holding the identical belongings. It refers back to the worth liquidity suppliers would have had in the event that they passively held onto their belongings as a substitute of offering liquidity. The research discovered that the quantity of liquidity suppliers underperforming a buy-and-hold technique exceeded 50% in a number of swimming pools, together with MATIC/ETH (51%), COMP/ETH (59%), USDC/ETH (62%), and MKR/ETH (74%). 

Interestingly, the researchers additionally discovered no distinction in profitability between “lively” liquidity suppliers who managed or adjusted their positions extra continuously and “passive” customers who didn’t.

The solely group that constantly outperformed a primary buy-and-hold technique have been so-called “just-in-time” liquidity suppliers who present liquidity for a single block to soak up the charges and immediately take away their place. These are extra refined market makers who leverage automated bots to supply liquidity and characterize a tiny fraction of the broader consumer base.

Commenting on the findings, the authors of the research mentioned:

“Our core discovering is that general, and for nearly all analyzed swimming pools, impermanent loss surpasses the charges earned throughout this era. Importantly, this conclusion seems broadly relevant; we have now collected proof that implies each inexperienced retail customers and complicated professionals battle to show a revenue below this mannequin.”

Uniswap launched its V3 replace in May, introducing a pioneering “concentrated liquidity” function that permits liquidity suppliers to pick the value vary they supply liquidity for. Uniswap Labs, the group behind the undertaking, sparked controversy within the DeFi neighborhood by defending the replace with a enterprise supply license. Several different decentralized exchanges together with Curve Finance and Sushi’s upcoming Trident undertaking have adopted their very own takes on concentrated liquidity since Uniswap V3 shipped.

The research’s findings elevate questions in regards to the efficacy of fixed function-based decentralized exchanges like Uniswap and Sushi. As the DeFi market matures and ever extra liquidity suppliers understand the risks of impermanent loss, liquidity on decentralized exchanges may dry up, resulting in greater slippage and considerably lowered effectivity and utilization.

Disclosure: At the time of writing, the writer of this function owned ETH, SUSHI, and several other different cryptocurrencies.

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