- Bancor and Topaze.blue conducted a study of impermanent loss in Uniswap V3.
- The study shows that about half the users providing liquidity to the protocol are losing money.
Meanwhile, investors and traders are pouring money into decentralized finance (DeFi) projects, generating billions in trading fee revenue per year. According to a new study, half of them are losing money from a phenomenon called ‘Impermanent Loss’ on Uniswap V3.
Bancor and Topaze.blue help a very thorough study of impermanent loss in Uniswap V3. To specify, Bancor is a decentralized liquidity protocol that offers a simple and safe way to trade crypto and earn yield on tokens.
Meanwhile, Topaze.blue is a boutique advisory firm in the crypto and fintech space. In particular, their study shows that about half the users providing liquidity to the protocol are losing money when compared to holders.
After finding that half of Uniswap V3 liquidity providers underperform a basic buy and hold strategy, researchers tried to understand whether some groups consistently outperform others. In detail, the study analyzed whether users who adjust their positions more often performed better than passive users who don’t.
In other words, it means that the study found analytical data that users who adjust their positions more often performed better than users who don’t. Thus, the findings question the generally held belief that ‘active’ LPs outperform ‘passive’ LPs in Uniswap V3.
Note that while Uniswap V3 generates the highest trading fees, impermanent loss overlooked the fee income in over 80% of the pools analyzed.
Not to mention, Uniswap pools included in the analysis generated $199 million in trading fees and acquired $260 million in the impermanent loss. This leaves a net loss of over $60 million and 49.5% of LPs with negative returns.