Half of Uniswap V3 Liquidity Providers Underperform Holding: Bancor Study

Half of the users providing liquidity on Uniswap V3 have suffered negative returns compared to just passively holding, a Bancor study has found. Read the full article by: Stefan Stankovic

Key Points:

• Uniswap is the largest and most popular decentralized exchange by almost every measurable metric. A benefit too using Uniswap is that it allows those who are putting up liquidity for others to trade make money on those transaction fees.

• Instead of the exchanges taking the maker fee when you add liquidity to their book, Uniswap lets the user profit from it. In theory this is a great opportunity for people that are essentially sitting on their crypto to earn something on.

• A study backed by Bancor and Topaze Blue found that about 50% of liquidity providers on Uniswap are yielding negative returns. One of the liquidity pools is showing that 74% of those LPs are in the negative. Based on this the standard buy-and-hold method outperformed those who were providing liquidity in any pool on Uniswap.

• This is due to impermanent loss which is the difference in value between depositing assets in multi asset pools or holding the same assets. While the pools generated $199 million in transaction fees they also incurred $260 million in impermanent losses.

• “Our core finding is that 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.” said the author of the study.