The supply of liquidity to Uniswap turned out to be unprofitable for half of the traders
Providing liquidity on decentralized exchanges is considered one of the most reliable ways of passive earnings in the DeFi industry. However, a new report by Topaze Blue and Bancor shows that this is not the case.
According to the report, since the launch of Uniswap v3, liquidity providers have earned $199.3 million in commissions, but at the same time lost $260.1 million due to a non-permanent loss. Thus, they could get $60.8 million more if they just held assets instead of providing them to pools.
A non-permanent loss or Impermanent Loss occurs as a result of a change in the ratio of assets in a particular pool. On Uniswap and other similar exchanges, the liquidity provider must provide both assets in equal proportions, the ratio of which is constantly changing relative to each other due to ongoing transactions.
As a result, at the time of withdrawal of the asset from the pool, the profit may be lower than from a simple retention, and not reflect the real situation in the market. It is assumed that a non-permanent loss should be compensated by commissions, however, as the results of the study showed, liquidity providers are often forced to put up with losses.
Highly liquid pools above $10 million were excluded from the study, as well as relatively stable pools based on similar assets, such as renBTC/WBTC and USDC/DAI. It turned out that of the 17,000 wallets analyzed, almost half of the liquidity providers (49.5%) would have earned more on simple asset storage.
The non-permanent loss exceeded the earnings from commissions in 80% of the pools reviewed. The most unprofitable pools with a predominance of non-permanent loss in the following proportions were MATIC/ETH (51%), COMP/ETH (59%), USDC/ETH (62%), COMP/ETH (59%) and MKR/ETH (74%). The authors note that for every $100 earned as commissions, there is a $180 non-permanent loss.
Analysts also found that in most cases, liquidity providers could not avoid a non-permanent loss, regardless of whether they used a passive management model or frequently changed positions:
"Our main conclusion is that in almost all analyzed pools, non-permanent losses exceeded the amount earned on commissions. Importantly, this conclusion applies to most situations: we have received evidence that both inexperienced retail users and professionals suffer from non-permanent losses."
The only group that managed to avoid this trend were "point" traders. They earned on the supply of liquidity within one block, after which they immediately withdrew the deposit until a non-permanent loss occurred.