- Almost half of Uniswap V3 liquidity poolers are better off simply holding their coins, according to a new study
- The study found that 49.5% of liquidity poolers ended up suffering impermanent loss
- Liquidity pooling requires calculating the bonding curve compared to fees
Almost half the liquidity providers on Uniswap V3 would be better off simply holding the assets instead, according to research published this week. A study conducted by Topaze Blue and Bancor found that some 49% of the liquidity providers on Uniswap V3 yielded negative returns compared to just holding the assets they pooled, with the fees charged to liquidity providers outweighing earnings in one out of two cases.
Riding the Liquidity Curve
The potential profit a liquidity provider can make depends on the bonding curve of the pair in question, a curve that liquidity providers must weigh against the costs (i.e. Ethereum gas fees, price drops etc). This class of automated market maker (AMM) suffers from what is commonly referred to as ‘impermanent loss’, which is the difference in value between depositing assets in dual token liquidity pools and simply holding the same assets.
The study looked at the activities of more than 17,000 wallets providing liquidity across 17 Uniswap V3 pools over a period of five months, which accounted for 43% of the exchange’s total value locked. It found that 49.5% of the liquidity providers had negative returns, with the pools generating $199 million in fee income during the sample period but incurring over $260 million in impermanent loss.
Get In, Get Fees, Get Out
The researchers also found no difference in profitability between “active” liquidity providers who actively managed their positions and “passive” users who didn’t. The only group that consistently outperformed a ‘hodl’ mentality were “just-in-time” liquidity providers who provide liquidity for a single block to absorb the fees and then instantly exit their position. These are more sophisticated market makers who often leverage bots to manage their liquidity pooling and represent just a tiny fraction of the broader user base.
