Fintec advisory agency Topaze Blue, at the side of Bancor, just lately printed a report about impermanent loss (IL) on Uniswap V3. They found that 49.5% of liquidity suppliers had suffered damaging returns because of IL.
The report mentioned liquidity suppliers, in the course of 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 perform as an Automated Market Maker (AMM). This refers to good contracts deployed on the blockchain utilizing mathematical formulation to cost property.
That is as a substitute of an order ebook technique 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 ebook technique 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 good 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 in search of 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 important the distinction, the extra the IL.
Nevertheless, buying and selling charges are added to the liquidity pool, which might, in some instances, offset IL, making publicity to it worthwhile. On the similar time, being a worthwhile liquidity supplier will depend on many variable components, together with the protocol, the pool, the deposited asset, and present market situations, making it a dangerous enterprise generally.
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 coated 17 swimming pools, which accounts for 43% of the whole worth locked within the protocol. They discovered that whole charges earned, from $108.5 billion in buying and selling quantity from Might 5 to September 20, had been lower than whole IL by $61 million.
“whole charges earned since inception till the cut-off date was $199.3m. We additionally discovered that the whole IL suffered by LPs throughout this era was $260.1m, which 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 higher 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 resolve to not present liquidity can count on to develop the worth of their portfolio at a quicker price versus an investor who’s actively offering liquidity on Uniswap v3.
Get an edge on the cryptoasset market
Entry extra crypto insights and context in each article as a paid member of CryptoSlate Edge.
Be a part of now for $19/month Discover all advantages
Like what you see? Subscribe for updates.