Backtesting Uniswap V2 Liquidity Provider Fees and Impermanent Loss

Summary

The article outlines a framework for evaluating liquidity provision on Uniswap V2. It compares four pools—two ETH pairs and two stablecoin pairs—using total value locked, trading volume, trade counts, and volume relative to locked value as a measure of capital efficiency. It reports that ETH/USDC had about twice the capital efficiency of DAI/ETH, and DAI/USDT was reported as substantially more efficient than DAI/USDC. These comparisons are presented as conditional on other factors remaining unchanged.

For fee estimation, the method uses liquidity snapshots around swaps, mints, and burns to infer an LP’s changing token amounts and fee share, then aggregates fees by asset. The appendix describes the constant product relation and a price-based calculation of new token balances, and frames impermanent loss as a cost that fees must offset. The article’s evidence is descriptive and relies on selected pools and API data; its backtest details and findings are incomplete in the supplied text. Market conditions, pool selection, and calculation assumptions limit how broadly its comparisons can be applied.

Key ideas

• The article compares Uniswap V2 pools using trading activity relative to total value locked.
• It proposes liquidity snapshots around swaps, mints, and burns to estimate LP fee income.
• The appendix uses the constant product relationship to estimate an LP’s changing token balances.
• Impermanent loss must be weighed against collected fees when assessing a liquidity position.
• The reported pool comparisons are conditional and may not generalize beyond the observed pools and period.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.