According to the latest study released by a group of blockchain analysts, the liquidity-providing activity of Uniswap v3 (UNI) users is not profitable "by design."
49.5% of liquidity providers suffer negative rewards
While it is widely perceived that liquidity provision on decentralized cryptocurrency exchanges (DEXes) with automated market-making engines (AMMs) is the most profitable passive income strategy in Web3.0, a recent study says that its status is far more complicated.
Amid 17,000 LP wallets analyzed, almost one-half (49.5%) demonstrated losses compared to simply holding assets. The impermanent loss dominated fee income for 80% of pools.
Since its v3 release, world-leading decentralized exchange Uniswap generated $199 million in liquidity rewards while the equivalent of $260 million disappeared due to an impermanent loss mechanism.
The authors of the research excluded from the analysis all pools with $10+ million in TVLs, all like-kind and stable-to-stable pools (e.g., renBTC/WBTC or USDC/DAI).
Which strategy is more profitable: active or passive?
The most painful losses were born by liquidity providers active in the following pools: MATIC/ETH (51%), COMP/ETH (59%), USDC/ETH (62%), COMP/ETH (59%) and MKR/ETH (74%).
The research team behind the analysis noticed zero correlation between the level of trading skills demonstrated by this or that liquidity provider and their net trading results:
Our core finding is that overall, and for almost all analyzed pools, impermanent loss surpasses the fees earned during this period. Importantly, this conclusion appears broadly applicable; we have collected evidence that suggests both inexperienced retail users and sophisticated professionals struggle to turn a profit under this model.
Also, there is no evidence that users who adjust their portfolios more frequently demonstrate more impressive results than "passive" liquidity providers.