Conceptualizing Uniswap v3 LP profit and loss


Are Uniswap v3 liquidity providers (LP) profitable? Recent research shows that at least in the most popular Uniswap v3 pool (USDC/WETH 0.05%), LPs have been suffering large losses. Is Uniswap¹ liquidity provisioning an irrational behavior that is expected to disappear with time? Not necessarily.


Feel free to skip this if you’re familiar with the context and existing discussions.

  • LPs: want fees to be big and liquidity concentration low relative to volatility

Misinterpretation Risks

What can, and what cannot be said about LP profitability using the existing analyses?

0xfbifemboy’s ETH/USDC analysis showing big losses for the 0.05% pool’s LPs, close-to-neutral results for 0.3% pool’s LPs
LP profitability condition from the LVR paper.

Which pools are profitable (against HODL)?

The LVR idea describes how arbitragers extract value from LP. Arbitrage order flow is considered “toxic”, as it forces the LPs to buy or sell against the market. The other flow, presumably mostly retail driven, is considered “uniformed”. If the uniformed flow dominates over the toxic flow, the pool does not suffer from the LVR problem.

Range orders as LP positions

In Uniswap v3, creating and closing LP positions can be a form of trading. Range orders can be used as either buy-limit or take-profit orders. The fact that the order earns fees is a nice side effect, but typically not critical for traders. From an analytical perspective, it’s important to note that traders are expected to close their LP position as soon as the order is filled. Furthermore, the LP position is expected to be highly concentrated, and during its lifetime, the price action is expected to be directional, not mean-reverting. Both of these features imply high IL.

  • 1% wide LP positions may not be possible in the higher fee tiers;
  • opening and closing the position is not instantaneous.

Just-in-time (JIT) liquidity

JIT liquidity is a form of MEV, so the mechanics and intentions of its actors are typically not openly discussed. One can guess, though, that JIT LPs would use some form of hedging. Or maybe JIT is combined with arbitrage trading. For instance, consider a JIT LP that has ETH and USDC both in a wallet and in a CEX. When the LP observes a large ETH -> USDC swap in the mempool, they deploy a LP position on Uniswap, and at the same time submit an ETH buy order on the CEX. After both trades, the LP has the same total amount of ETH and USDC as before. Assuming that the following holds, the LP are also profitable:

Hedging for sideways markets

“How to hedge an Uniswap position to make it delta-neutral” is something of a holy grail topic in the LP community. Many have attempted this, few if any of those I have talked to have succeeded.

Payoff function of a partially hedged (H=0.45) Uniswap position

What can be improved in future analyses?

Summing up these ideas, I would like to see more of the following:

  • Be careful with generalizations of the conclusions.
  • Distinguish between profits in HODL terms, USD terms, and ETH terms (already done in the Flipside study), since different LP may be optimizing for different goals: for instance, they may want to accumulate more ETH, or may be using borrowed funds to LP.
  • Empirical PnL analysis in some specific market conditions is great because it provides the ground-truth data. However, due to the large number of factors affecting these real-life results, they should be extended with price path simulations. As a minimum, they should be parametrize with the price action (bull/bear/crab) during the analysis period.
  • Recognize that under certain assumptions LP positions can be used as insurance against sideways markets, not expected to be profitable on their own.
  • Have more open discussion and research on LP’ing strategies and optimal parameter selection methods.



Researcher and software developer

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