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Half Of Uniswap v3 Liquidity Providers Are Losing Money – Analysis.

According to a recent analysis of Uniswap v3 pools, about half of liquidity providers are losing money owing to temporary losses.

According to recent research, temporary losses have been a growing concern for liquidity providers on Uniswap v3.

According to research released on Wednesday by Topaz Blue and the Bancor Protocol, 49.5% of liquidity providers (LP) on Uniswap v3 have seen negative returns due to temporary loss (IL).

According to the data, Uniswap v3 produces the most fees of any automated market maker (AMM), but IL outperforms them. Holding, according to the study, may have been a superior alternative for liquidity providers.

When the spot price of the assets they have added to a liquidity pool fluctuates, LPs on AMMs experience impermanent loss. Because liquidity providers combine two assets to generate a position, the coin ratio in the position fluctuates as asset spot values fluctuate.

If a user supplies a liquidity pool with equal amounts of Tether (USDT) and Ethereum (ETH) in US dollars and the price of ETH rises, arbitrageurs will begin to take ETH from the pool in order to sell at a higher price. As a result, the USD worth of the user’s position decreases, resulting in an impermanent loss.

In this context, the research argues unequivocally that supplying liquidity to Uniswap V3 has inherent risks.

At the time of the study, the pools investigated accounted for 43% of Uniswap v3’s total liquidity. From May 5 through September 20, 2021, the examined pools produced $199 million in fees from $108.5 billion in trading volume.

Those pools lost $260 million in temporary losses throughout that time period, yielding a net total loss of $60 million.

IL outweighed the fees generated by liquidity providers in 80% of the 17 pools studied. WBTC/USDC, AXS/WETH, and FTM/WETH were the only three pools examined.

The researchers also wanted to see if active methods produced different results than passive techniques. A user who is active alters their position more frequently than a person who is inactive. While the research predicted that short-term active traders would beat passive traders, no link between shorter-term positions and better earnings could be discovered.

Those that held for more than a month outperformed the market the best, as practically all time periods less than a month saw IL outperform earnings.

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