The belief that all liquidity providers (LPs) make lucrative gains for depositing funds across various decentralized protocols like Uniswap and Compound, among others, has been refuted by a new study conducted by Topaze Blue and decentralized liquidity platform Bancor.
Liquidity Providers Make Losses
According to the survey shared with CryptoPotato, nearly half of the users providing liquidity on Uniswap V3 always end up losing money as against making gains from just holding the crypto assets.
This is as a result of the impermanent losses (IL) incurred on trading fees across various pools, the report added.
The study focused on activities on Uniswap V3, an Ethereum-based DeFi protocol, between May 5, 2021, and September 20, 2021.
During the study, over 17,000 wallets belonging to liquidity providers on the platform were analyzed. Furthermore, a total of 17 pools, including MATIC/ETH, COMP/ETH, and USDC/ETH, were also observed in the study.
Impermanent Losses Surpasses Trading Fees
Of the $108.5 billion trading volume recorded across these pools, trading fees accounted for $199 million. While this could have been major gains for LPs, impermanent losses wiped out fee income in more than 80% of the pools, with $260 million incurred in IL alone.
Based on this, users were left with a net loss of over $60 million, while 49.5% of liquidity providers had to settle for a loss.
The report noted that for every $100 worth of fees, users suffered an impermanent loss of $180, representing a net loss of $80.
Per the study, the pools that saw the major impermanent losses are MATIC/ETH (51%), COMP/ETH (59%), USDC/ETH (62%), COMP/ETH (59%), and MKR/ETH (74%).
“Our core finding is that overall, and for almost all analyzed pools, impermanent loss surpasses the fees earned during this period,” the report noted.
All Trading Styles Affected
The study also examined whether some LPs made more profit than others in terms of their trading style.
For this segment, the researchers made comparisons between active users, traders who adjust their positions more frequently, and passive users, and traders who prefer to hold their assets for a long term.
However, there was no statistical evidence that active traders made more gains than their passive counterparts, as IL surged more than the fees in all categories.
Interestingly, the only group of users who made more gains were just-in-time (JIT) traders, who benefitted from providing liquidity for a single block and quickly removing their deposits before impermanent losses set in.