Half of the users who provide liquidity in Uniswap V3 are suffering from negative benefits, new research found by DailyCoin
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Highlights:
- A study of permanent losses in V3 found that approximately half of the users who provide liquidity to the protocol are losing money compared to HODLing.
- While Uniswap V3 generates the largest trading quota of any DeFi protocol, permanent losses dominated share revenue in more than 80% of the pools studied.
- The Uniswap pools included in the analysis generated $ 199 million in trade commissions and suffered permanent losses of $ 260 million, leaving a net loss of more than $ 60 million and negative returns of 49.5% of LPs.
- The percentage of users who suffered from negative returns was 70% in some pools; The proportions of users who suffer losses in key groups are as follows: MATIC / ETH (51%), COMP / ETH (59%), USDC / ETH (62%), COMP / ETH (59%) and (74%).
- The study found no statistical evidence that users who adjust their positions more often work better than users who don’t, and questioned whether “active” LPs outperform “passive” LPs in Uniswap V3.
- In contrast, the study found that LPs who shared on average longer periods beyond the 1-hour horizon lost less than those who only shared for a short period of time.
Automated Market Makers (AMMs) have become the basis for decentralized finance. Users have invested more than $ 30 billion in AMMs in all major blockchains, generating revenue of billions of dollars a year. However, the financial risks associated with AMMs continue to be misunderstood. The cost of providing liquidity, known as permanent loss, is often overlooked.
A new study removes the profit fabric of liquidity providers today in AMMs. An analysis of more than 17,000 portfolios that offer liquidity in Uniswap V3 reveals that approximately half of users are suffering from negative returns on their equity capital as a result of permanent loss.
Although Uniswap V3 generates the largest trading quota of any DeFi protocol, the final loss completely eliminated quota revenue in more than 80% of the pools studied.
Of the 17 pools examined, only 3 achieved quotas that exceeded the permanent loss.
The study looked at seventeen pools, 43% of Uniswap V3’s TVL. Pools were selected by size (pools with less than $ 10 million TVL were excluded), data availability, and token composition (similar and stable pools such as renBTC / WBTC and USDC / DAI were excluded).
The sets examined generated a staggering $ 108.5 million in trading volume and $ 199 million in revenue from May 5 to September 20, 2021. However, at the same time, the pools suffered permanent losses of more than $ 260 million, leaving 49.5% of LPs with negative profits. .
In some groups, the percentage of users who experienced negative performance ranged from 55-70%, including MATIC / ETH (51%), COMP / ETH (59%), USDC / ETH (62%), COMP / ETH (59) . % and MKR / ETH (74%).
On the right, the percentage of wallets that make money in each of the pools studied (green) and the loss of money (red). On the left, the average yields of losers (red) and winners (green).
After seeing that the average liquidity provider Uniswap V3 does little basic purchasing and retention strategy, the researchers wanted to understand whether certain groups consistently outperform others. Specifically, the study examined whether they performed better than “passive” users who did not perform “frequent” positions that fit positions more often.
To this end, the duration of pool positions was compared with the earnings obtained with their LPs. It was assumed that, on average, shorter-term positions correspond to more active LPs. It is likely that those who enter the market and soon leave will implement a pre-planned strategy and may be seen as more sophisticated, or at least more active, than those who stay longer. Analyzing the profitability of positions in terms of duration, the researchers wanted to test the hypothesis that active LPs work better. However, no correlation could be found between shorter-term positions and large gains. In all groups, the permanent losses exceeded the quotas earned, questioning the widespread belief that LP assets outweigh liabilities.
Rates measured by IL vs. position duration.
The only group that consistently made money over time compared to mere HODLing were the liquidity providers of time or “JIT”, who provided liquidity for a single block to absorb quotas from incoming trades, and immediately removed their position. This liquidity was provided within the block and did not result in a significant IL, leaving 100% of the contributions as a gain. All other segments have an IL / quota ratio greater than 1, which indicates a net loss in value. The upper limit of this ratio was as high as 1.8, which is $ 100 per share value that liquidity providers incurred at $ 180, leaving a net loss of $ 80.
“Our main finding is that, in general, and in almost all of the pools studied, the permanent loss exceeds the shares earned during this period,” the study authors concluded.
“Importantly, this conclusion seems very applicable; we have gathered evidence that inexperienced retail users and sophisticated professionals are struggling to make a profit under this model. Learn more about permanent loss.
MAGAZINE WOMAN
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