Why shouldn’t you be the liquidity providers on Uniswap V3 for now?
How can Ordinary Liquidity Providers Earn Liquidity Mining Rewards on Uniswap V3?
November 17th, Topaz Blue and the Bancor Protocol released an in-depth study of Uniswap V3 earnings. The report provides statistics on the fee income and impermanent loss. Surprisingly, according to the report, almost half of the liquidity providers (LPs) on Uniswap v3 had negative earnings due to impermanent losses (ILs) during this period.
This article will analyze in more depth, based on the content of the study, which types of liquidity providers, as one the most important roles in DEX, actually profit from Uniswap V3.
Based on the data compiled in the report, 49.5% of the overall liquidity providers are not earning any revenue due to impermanent losses and are in a loss position, while if we consider the liquidity providers as a whole, it is in a loss position due to IL. Therefore, Uniswap V3 is not a platform for general liquidity providers to earn high expected returns at this time.
Meanwhile among all liquidity providers, the only group that consistently profits is Flash LPs that provide liquidity in only one block, which came to be known as “Just-in-Time” (JIT) liquidity. However, due to the technical requirements for achieving JIT Liquidity, there is absolutely no actionable execution space for ordinary investors. At the same time, apart from this group of professional liquidity providers who have the technical skills to execute Flash LPs, it is not possible to distinguish which group of characteristics can benefit from providing liquidity on Uniswap V3 based on indicators such as the size of capital and frequency of liquidity rebalancing.
At the same time, the IL/Fees of the other groups compared to the Flash liquidity providers are always >1, which means that they are all in an overall loss position, and the ratio of the highest group is 1.8, which means that for every $100 in transaction fees, the liquidity provider has to bear $180 in impermanent losses, with a net loss of $80.
In Addition, those professional teams, because of their experience and technical abilities, have a great competitive advantage over ordinary investors. Therefore, we hold the opinion that the majority of the wallets that provide liquidity on Uniswap V3 and earn revenue belong to the professional trading team.
So if you are just an ordinary liquidity provider, based on the current Uniswap V3 ecosystem, it is not recommended to provide liquidity and you are likely to be in a losing position compared to a simple HODL strategy.
How does the Uniswap V2 solve this Problem?
One thing that all DeFi users know very well is that the success of Uniswap V2 is largely based on its support for liquidity mining through LP Token Staking.
Liquidity Providers of Uniswap V2 will receive ERC-20 standard LP Token after providing liquidity in the trading pool, and users who pledge them into the liquidity mining pool will not only receive Uniswap V2’s share of transaction fees, but also the liquidity incentive provided by the corresponding project owner.
On the one hand, it can compensate for the IL caused by the fluctuation of token price, and at the same time, the project side also uses the relatively high APR to motivate users to provide liquidity for their own project token trading pairs to meet the demand of secondary market trading users.
How can Liquidity Providers earn Liquidity Mining Rewards on Uniswap V3?
In order to solve the situation that general liquidity providers of Uniswap V3 are not gaining enough or even prone to lose, Izumi has uniquely designed a liquidity mining mechanism for a specific price range based on Uniswap V3 LP NFT. With izumi, liquidity providers could earn liquidity mining rewards from not only the project incentive program but also izumi’s own platform token — iZi.
In izumi’s v3NFT Mining, liquidity providers of Uniswap V3 could stake their LP NFT on izumi platform, and the algorithm converts each NFT into an FT to calculate the percentage of rewards that should be earned for that LP NFT.
LP will get rewards when the price range in the LP NFT of Uniswap V3 overlaps with the price range of the liquidity mining incentive. In addition, based on the same amount of token0 and token1, the maximum gain is obtained when the upper and lower bounds of the liquidity price range overlap exactly with the upper and lower bounds of the liquidity mining incentive price interval.
This design also reduces the willingness of professional market maker teams to go for Flash Liquidity because there is no way to get additional Liquidity Mining incentives while providing Flash Liquidity, so ordinary liquidity providers will have more advantages in this situation, and professional market maker teams will be more tend to rely on LP NFT Mining for liquidity incentives rather than simply relying on Flash Liquidity for fee arbitrage gains.
About izumi Finance
izumi Finance is the first protocol to support Uniswap V3 “non-homogeneous” liquidity mining and extend concentrated liquidity service for multi-chains. izumi provides “Liquidity as a Service” (LaaS) based on Uniswap V3, with innovatively designed liquidity mining modules of “Concentrated liquidity mining” model for stable assets with a fixed price and “One-sided non-impermanent loss Mining” model for non-stable tokens. These structured models would support any blockchain project to better implement liquidity incentives with much higher capital efficiency and enable liquidity providers to earn extra rewards.