Should you be a liquidity provider on Uniswap?
After my Curve post last week, people stopped me on the street, and I received tons of DMs. My other social media profiles were flooded with the same message: WEN @Uniswap POST?
It’s NOW, anon!
I bet you’re thinking: Why didn’t he start with Uniswap? Is he a Curve Maxi? No, frens, the reason why I published the Curve thread first is that on Curve, all LPs from a pool receive the same IL and swap fees. However, it’s different on Uniswap.
On Uniswap, how much money you make (or lose) depends on the range you choose when adding liquidity
- Narrow range: More fees 💰, higher Impermanent Loss 📉
- Wide range: fewer fees 💰, smaller Impermanent Loss 📈
There’s no one-size-fits-all when it comes to ROI on Uniswap.
But calm down, anon, there’s still hope! If we use Arrakis Finance pools as a proxy, we can estimate profitability. If you are not familiar with Arrakis, they deploy managed liquidity pools, which means they rebalance LP ranges, so you don’t have to worry about that.
Ok, let’s see some examples.
🧠 Remember that:
- On Uniswap, you can choose the fee tier to provide liquidity
- There's no impermanent loss for pools with pegged assets like DAI/USDC.
In the following chart, you may notice some interesting information:
1. LPs earned an APY of around 0.3% over one year.
2. These pools have similar performance, but during times of high volatility, the 0.05% pool generated better returns
Have you seen this sleek chart? It’s the new design from DeFiReturns.com, which will be launching publicly soon. You’ll be able to enjoy this beauty with your own hands. 🤩
In the next image, you can see a comparison of Uniswap V3 returns with Aave’s and Compound’s lending pools:
Lending pools are currently offering 5x or 6x the APY that LPing in Uniswap provides!
Of course, returns depend on the range you select, but these Arrakis pools can give a good estimate of what your returns might look like.
Next topic: Impermanent Loss and the all-mighty USDC/wETH pool!
If you LP on Uniswap and the relative price of your tokens changes, you’ll start holding more of the now cheaper token and sell your expensive token. In such cases, you might be better off simply holding your initial position than providing liquidity in the pool.
For significant price swings, the swap fees may not be sufficient to cover your losses. LPing on Uniswap means betting the prices won’t change much, so your swap fees can cover any impermanent loss.
Let’s take a look at a real-life example:
trxn 0x3849bd26f27be95b205895e1629601f898e2af61c9db91e6650d3248338910a0 and 0x475dde55260f58499dd63c8825ff651ec8cbb5dbb23331294ccac40daf7cc9b8 on mainnet.
This person added liquidity using Arrakis on Apr-28–2022 and removed liquidity on Jun-18–2022 in less than two months. They added liquidity with 3623 USDC and 1.39 ETH, with ETH costing US$2897.00, for a total investment of US$7647.52.
ETH prices decreased from April to June, and on Jun/18, ETH was worth around 1093 USD. At that time, the person’s tokens would have been worth 3623 + 1520 = US$5143. However, this person had LP’d, and when they removed their liquidity, receiving only 18.58 USDC and 2.789 ETH.
At that ETH price, their position was only worth US$3068.74. Their impermanent loss was US$2075 in under two months, resulting in an RoI of -40.4%.
Here is an example of how an LP position in the USDC/wETH 0.3% pool evolved over the past 12 months, with a current loss of 17.9%. Shocking, right?
That’s all, folks! I created this thread using data from DeFiReturns.com, and you can use our app to explore realized returns and IL for almost 50 strategies in DeFi. We are going to launch a really nice new UI really soon, too. Stay tuned!
