New Study Finds That Liquidity Providers on DeFi Platforms Are Losing Money

A new study has found that nearly 50% of users on the Uniswap platform are losing money. How? They are bleeding from the maker fee structure on the crypto DeFi swap platform.

Uniswap is by far the most popular platform for DeFi swaps. Still, according to a study of 80% of the liquidity pools, the platform does not seem to favour traders providing liquidity on that network. More than $199m was generated in trading fees, but impermanent losses totalled $260m. This comes to a total loss of $60m, representing 49.5% negative returns to liquidity providers (LPs).

The percentage loss represents an average. Some liquidity pools had notoriously higher loss returns than others. Those implicated include pools involving MakerDAO (MKR/ETH), Polygon MATIC/ETH), Compound (COMP/ETH) and USD Coin (USDC/ETH). The MakerDAO and USD Coin pools had a loss percentage return of 74% and 62%, respectively.

The study adds a new dimension to the discussion of just how profitable the automated market maker platforms really are. Automated market makers (AMMs) were developed to protect those providing liquidity to DeFi swap pools from the downside risks associated with liquidity provision activity. Risks associated with these tools are either downplayed or not well understood.

This new study attempts to understand the real risks associated with providing liquidity to DeFi pools using AMMs. More than 17,000 wallets in Uniswap V3 were studied to come up with the findings. While the platform generates the highest fees among DeFi protocols, the study shows that the impermanent losses are wiping out these fees.

Analysis of Study Findings

Here is a summary of the study, which Topaze Blue conducted:

  • 17 liquidity pools were studied, equivalent to 43% of the total value locked on Uniswap V3.
  • Pools were selected using a cutoff mark of $10m in total value locked. T
  • Token pairings featuring cryptos with similar fundamentals or pairs featuring stablecoins such as USDC/DAI were not included.

The study showed that between May 5 and September 20, 2021, impermanent losses totalled $260m versus $199m in earned fees. This translated to 49.5% in negative returns.

The findings indicate no benefit in using basic buy-hold strategies or active scalping-style strategies. Those who held positions for the long-term lost as much money as those who held short-term positions. However, those who quickly added liquidity as a new block of trades came in, and removed such liquidity immediately after, were those who made money on the platforms. 

About Bancor Protocol

Bancor Protocol is a decentralized liquidity protocol that allows users to earn trading fees by staking their tokens, which provides liquidity to the platform.

The platform features smart contracts that pool liquidity and allow automated trading with no counterparty risks. Protection from impermanent loss is a standout feature of the Bancor platform, protecting traders from losing money while earning yields. Traders can earn up to 60% returns annually on tokens that feature Ethereum, Wrapped Bitcoin, Polygon and Chainlink.