Fintec advisory agency Topaze Blue, together with Bancor, lately printed a report about impermanent loss (IL) on Uniswap V3. They found that 49.5% of liquidity suppliers had suffered unfavourable returns resulting from IL.
The report stated liquidity suppliers, throughout the evaluation interval, would have been higher off if they only held their tokens.
What’s impermanent loss?
Uniswap is a decentralized finance protocol for exchanging cryptocurrencies. The protocol carries out this operate as an Computerized Market Maker (AMM). This refers to sensible contracts deployed on the blockchain utilizing mathematical formulation to cost belongings.
That is as a substitute of an order guide methodology utilized by conventional centralized exchanges, which depend on a pricing algorithm to facilitate the shopping for and promoting course of.
AMMs work equally to the order guide methodology in that there are buying and selling pairs, for instance, ETH/MATIC. However the principle distinction is, with an AMM, you don’t want a counterparty (one other dealer) on the opposite aspect to make the commerce. As an alternative, interplay takes place with the sensible contract that “makes” the market.
To facilitate this, AMMs depend on liquidity swimming pools that are crowdsourced swimming pools of tokens locked in a wise contract. Buyers add their tokens to liquidity swimming pools searching for returns.
IL occurs when an investor provides liquidity to a liquidity pool and the worth of the deposited asset adjustments in comparison with the worth on the time of deposit. The extra vital the distinction, the extra the IL.
Nonetheless, buying and selling charges are added to the liquidity pool, which may, in some circumstances, offset IL, making publicity to it worthwhile. On the identical time, being a worthwhile liquidity supplier is determined by many variable components, together with the protocol, the pool, the deposited asset, and present market circumstances, making it a dangerous enterprise on the whole.
Uniswap V3 has inherent dangers related to offering liquidity
The analysis performed by Topaze Blue states there are inherent dangers when offering liquidity to Uniswap V3.
Their sampling lined 17 swimming pools, which accounts for 43% of the overall worth locked within the protocol. They discovered that complete charges earned, from $108.5 billion in buying and selling quantity from Could 5 to September 20, had been lower than complete IL by $61 million.
“complete charges earned since inception till the closing date was $199.3m. We additionally discovered that the overall IL suffered by LPs throughout this era was $260.1m, that means that in combination these LPs would have been higher off by $60.8m had they merely HODLd.”
Evaluation confirmed, of these 17 swimming pools, 80% had IL better than the charges earned. With solely the WBTC/USDC, AXS/WETH, and FTM/WETH swimming pools seeing internet constructive returns.
The report concludes that customers who determine to not present liquidity can count on to develop the worth of their portfolio at a sooner charge versus an investor who’s actively offering liquidity on Uniswap v3.
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