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Do you know around 50% of users of UniSwap lose all of their profit because of impermanent losses?
There’s a relevant dashboard which shows that Uniswap V3 liquidity providers for the ETH/USDC pair have on aggregate lost $115 million: [https://dune.com/thiccythot/uniswap-markouts](https://dune.com/thiccythot/uniswap-markouts)
Here’s a fun thread from the creator of that dashboard: [https://twitter.com/thiccythot_/status/1589022227437039616](https://twitter.com/thiccythot_/status/1589022227437039616)
To me, providing liquidity is also a DCA strategy, since I only pair with stables (witht the exception of ETH-BTC).
If the price of a token paired with USDC falls, the LP weoght will shift towards the non stable. In other words, my probided USDC will ve spent to buy eg. ETH.
On the other hand, when the price increases, my LP „DCA out“ since it will gradually „sell“ ETH and get more USDC
This is just because most people don’t know how to provide concentrated liquidity in an efficient way. The average UniV3 user holds a position for less than 30 days, has too narrow of limits, and doesn’t not skew their limits based on the overall market trend. If you check out Revert Finance and filter Eth/USDC positions by value >$10,000 and a time period of >30 days, you’ll see that almost everyone is collecting more fees than their impermanent loss. These are the smart market makers. The ones are making their limits too narrow, then constantly adjusting them so that they can stay in range are losing.
Wrong in my opinion.
When you participate in a LP, you are holding “the average” of the two coins. What that means is gains will be lower when Coin A moons, AND also losses will be lessened when Coin B goes tits up. That is the trade-off.
If you are savy about it, you would treat all of this as a limit order. You use the LP to rebalance, and when you exit you probably just sold high or bought low. What we should be doing in the first place
I don’t get the issue of imperment loss for risk averse investors.
Impermanent Loss is the difference between the value of the held tokens in the pool vs HODLing the same tokens.
Let’s assume we have Token A paired with a Stablecoin, if the Token A raises in price it means it is bought a lot via the pool and therefore the pool is drained of this (higher demand asset) therefore my share looses in value compared to HODLing token A (as constantly token a are taken out of the pool)
So far so bad.
But. How do I know in advance that TOKEN a will rise in price? The risk averse investor would say, you cannot know that Token A will rise – but you do know in advance that I will earn Trading Fees in the pool if the pool is traded.
Therefore holding a token is actually Speculation, Providing Liquidity is more similar to a fixed return investment, because as long there is trading, fees are earned.
Even better if Token A Looses value, your Position in LP will loose less value, because if Impermanent Loss is a thing, “imperment win” must also be the case if prices drop. (this works in both directions)
Bullish
That use to be the scenario with me back in 2021 when I used to participate in Uniswap liquidity mining but since I’ve come across metastaking it has been a different experience as I participate in the event EGLD/UTK pool.
Do you know 90% of Uniswap users don’t realise the loss is very permanent.
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This is worrisome