- A recent analysis reveals today’s AMM liquidity provider earnings.
- Bancor users deposit tokens to gain trading fees and liquidity benefits.
Automated Market Makers (AMMs) have become a decentralized financial staple. Across all main blockchains, users have staked over $30 billion in AMMs, producing billions in trading fees. However, the financial dangers of AMMs are still unknown. The cost of providing liquidity is often neglected. Stefan Loesch launched Topaze.blue, a crypto asset and fintech advice business. Followed by Paribas’ team in FX and stock derivatives.
A recent analysis reveals today’s AMM liquidity provider earnings. An analysis of over 17,000 wallets offering liquidity in Uniswap V3 shows that about half of consumers are losing money. Contrary to popular belief, Uniswap V3 yields the highest trading costs of any DeFi protocol.
The research looked at 17 pools, which accounted for 43% of Uniswap V3 TVL. As-kind and stable-to-stable pools like renBTC/WBTC and USDC/DAI were omitted.
Negative Returns
From May 5th to September 20th, 2021, analyzed pools produced $108.5b in trading volume and $199m in fees. Simultaneously, the pools lost nearly $260 million, leaving 49.5% of LPs with negative returns. Some pools saw negative returns of up to 70%, including MATIC/ETH (51%), COMP/ETH (59%) USDC/ETH (62%) and MKR/ETH (59%) (74 percent).
A buy-and-hold strategy outperforms the average Uniswap V3 liquidity provider. Thus researchers looked at whether particular groups regularly outperform others. The research looked at whether “active” users who moved more often outperformed “passive” users.
Only JIT (just-in-time) liquidity providers regularly generated money compared to HODLers, since they supply liquidity for a single block to absorb costs from incoming transactions, then immediately remove their position. This intra-block liquidity caused no IL. Hence the fees were all profit. The IL/fees ratio for all other parts is more than 1, suggesting a net loss. This ratio might reach 1.8, implying that for every $100 in fees, liquidity providers lost $80 in IL.
The study’s authors concluded:
“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.”
Bancor is a decentralized liquidity protocol that makes it easy to trade crypto and earn income. The protocol uses smart contracts to pool liquidity and execute transactions without a third party. Bancor users deposit tokens to gain trading fees and liquidity benefits. With Bancor, customers may receive income while maintaining single-token exposure and 100% protection against impermanent loss.
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