Recent inquiry shows that impermanent losses have go an increasing issue for liquidity providers on Uniswap v3.

A Wednesday report by Topaz Blue and the Bancor Protocol institute that 49.v% of liquidity providers (LP) on Uniswap v3 have incurred negative returns from impermanent loss (IL).

The report highlighted that Uniswap v3 generates the highest fees of whatsoever automated market maker (AMM), but IL surpasses those earned fees. The enquiry surmised that hodling may have been a improve option for liquidity providers.

"The average liquidity provider (LP) in the Uniswap V3 ecosystem has been financially harmed by their option of activities and would have been more assisting only holding their assets."

Impermanent loss is a phenomenon that occurs to LPs on AMMs when the spot price of the assets they have added to a liquidity pool changes. Since liquidity providers pair two assets together to form a position, the ratio of coins in the position changes when asset spot prices change.

For instance, if a user has supplied equal values of Tether (USDT) and Ether (ETH) in Us dollars to a liquidity pool and the cost of ETH goes up, arbitrageurs will begin to remove ETH from the pool to sell at a higher price. This leads to a subtract in the USD value of the user's position, otherwise known every bit an impermanent loss.

In this regard, the report states in no unclear terms that at that place are inherent risks when providing liquidity to Uniswap V3.

"The user who decides to non provide liquidity can look to grow the value of their portfolio at a faster rate than i who is actively managing a liquidity position on Uniswap v3."

The pools that were studied accounted for 43% of all of Uniswap v3's liquidity at the time of the research. In total, the analyzed pools generated $199 million in fees from $108.5 billion in trading book from May 5 to Sept. 20, 2022.

During that time frame, those pools suffered $260 million in impermanent losses, resulting in $60 million in internet total losses.

Of the 17 pools analyzed, 80% saw IL outweigh the fees earned by liquidity providers. Only iii pools of those analyzed — WBTC/USDC, AXS/WETH and FTM/WETH — saw net positive gains. Some pools marked losses well to a higher place 50% such as the MKR/ETH where 74% of users reportedly fabricated a loss.

The study also sought to decide whether active strategies would produce different results than passive strategies. An active user adjusts their positions more frequently than a passive user. While the report expected brusk-term active traders to outperform passive traders, no correlation could be plant between shorter-term positions and higher profits.

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Out of the major time segments analyzed, those who held longer than a month performed best, as almost all time frames lower than a month however saw IL outpacing earnings.

Flash liquidity providers were the but group that saw no meaningful IL.

The study offers a stark conclusion for users who are considering providing liquidity on Uniswap v3. While information technology does state that a winning strategy could potentially exist formulated, expected returns may be "comparable to the annual rates offered by mainstream commercial banking products."