Research: “half of the liquidity providers on Uniswap v3 were at a loss”

Topaz Blue and Bancor Protocol have conducted a profitability analysis on the delivery of liquidity on the Uniswap v3. It turned out that the “inconsistent losses” for 49.5% of suppliers exceeded their profits.

The point is that asset ratios are constantly changing in liquidity pools. At the same time, initially the liquidity provider provides equal proportions of assets, but after transactions are completed, the ratio changes.

Often, the supplier receives the so-called “volatile losses”, the size of which depends on the change in the ratio in the pools. The income from commissions for the supply of liquidity should compensate for this loss, but, as the researchers note, this does not always happen.

“Often, depending on the choice of the pool, the liquidity provider is at a loss. At the same time, if he simply kept the asset, he would have made a profit, ”the report says.

According to the researchers, since the launch of Uniswap v3, liquidity providers in the analyzed pools have received income from commissions of $ 199 million with a volume of transactions of $ 108.5 billion.

However, the researchers analyzed the performance of not all liquidity pools. The study did not include pools with liquidity over $ 10 million, as well as pools with similar assets (for example, renBTC / WBTC). The volatile loss exceeded commission income in 80% of the pools reviewed.

Interestingly, the experience of liquidity providers is practically irrelevant – both new users and large professional players receive losses. At the same time, the longer suppliers have frozen an asset in liquidity pools, the better their financial result looks.

But providers of liquidity for instant loans almost do not incur losses – since the loan is returned in the same transaction, there are practically no inconsistent losses.

Trading volume on decentralized exchanges has grown 550% since the beginning of 2021, according to a recent report by market research firm Chainalysis.