A research conducted recently has revealed that as many as 49% of liquidity providers have been increasingly losing their investments on Uniswap v3 pool. The research, conducted by Topaz Blue and the Bancor Protocol, explains that impermanent loss is the leading cause of the poor returns on the protocol.
The report emphasized that Uniswap collects the highest fees amongst all Automated Market Makers presently, but IL is still ahead. The report surmised that holding could be the best alternative for stakers, given the circumstance. Stakers have been hampered by the decisions of the protocol lately, and it has resulted in poor returns for these providers.
A Look at the Cause of the Poor Returns
Impermanent loss occurs when spot prices of crypto assets on AMMs change. It’s a common phenomenon that stakers pair two coins to achieve a position, and that’s how transactions are facilitated. The ratio of assets in this position alters, when their spot prices in the stated position changes in the market.
Impermanent loss happens when one of the assets provided to a liquidity pool rises in price. For instance, if a staker supplies equal USD values in Tether and Litecoin to a liquidity pool, and the price of Litecoin rises, arbitrageurs start to remove Litecoin to sell the crypto to meet market demand. This results in a reduction of the dollar value of the position, which leads in the loss of income for liquidity stakers.
As a result, the risks associated with supplying liquidity to the decentralized pool becomes massive. Given the circumstances, providers who are against supplying liquidity can expect a higher return at a much faster rate when they hoard their assets than managing a liquidity position.
Liquidity Pools Generated $199M
As at the time of this publication, the seventeen pools that were studied accounted for 43% of liquidity of Uniswap. According to the report, the pools generated close to $199M from a trading volume of $108.5B recorded between May and September this year. In that span, the analyzed pools lost $260M to impermanent losses.
According to the research, 80% witnessed their IL surpass the earned fees by as much as 50%. Only three pools experienced net positive profits. The study observed the different positions of active (short-term positions) and passive users (long-term positions), and it was discovered that short-term positions or active users recorded lower profits than long-term positions or passive users. Therefore, long-term holders performed best.
The study is stark reality and proof that supplying liquidity to Uniswap v3 pools is no longer profitable. Those considering it should instead opt for long-term positions, as expected returns are significantly higher compared to providing liquidity.
Tokenhell produces content exposure for over 5,000 crypto companies and you can be one of them too! Contact at info@tokenhell.com if you have any questions. Cryptocurrencies are highly volatile, conduct your own research before making any investment decisions. Some of the posts on this website are guest posts or paid posts that are not written by Tokenhell authors (namely Crypto Cable , Sponsored Articles and Press Release content) and the views expressed in these types of posts do not reflect the views of this website. Tokenhell is not responsible for the content, accuracy, quality, advertising, products or any other content or banners (ad space) posted on the site. Read full terms and conditions / disclaimer.
