Rudy Insight — The Risk in Uniswap: Fees vs. Impermanent Loss


The problem of how to avoid risk in investing has its ins and outs. It’s difficult to comprehend and even more difficult to apply. Every tool and topic that we study, could be covered in greater and greater detail and you could pursue the problems of risks almost forever, but then we wouldn’t actually have time to invest. We will try to deduce new things from the old, but never loose the DeFi-native view. We will try to transform you from someone who can’t understand the risk to one who can apply risk management in his portfolio or bring it to his company. We will show you a toolkit of risk management tools that will allow you to protect yourself against many kinds of risks. Four distinct posts will walk you from theory to application and explain to you (1) What is it? (2) What are the risks it protects against? (3) How to apply it systematically to your portfolio? What quick heuristics can you apply to speed it up? (4) How to use the tool?

Authors: Nicolay Gerold, Christian Viehof, Valentin Kalinov

This is post is part of Rudy’s Synthetix series. If you want to know what Synthetix is, look here.

It’s been a tough few months for crypto. Mainstream media blaming DeFi for the recent crash. Traditional investors writing down crypto. In the meantime, impermanent loss is killing your LP fees with plummeting prices.

Last week, we took a first look at the “fee switch” proposal in Uniswap; a new proposal that could convert Uni from a governance to an equity-like token. But what is costlier? The fees to the Uniswap protocol or the impermanent loss incurred by investors?

A quick reminder: The fee switch isn’t about paying out fees to the UNI token holders, but is about the ability to retain a portion of what is already being paid by users in the treasury. It’s a tax, not an income re-distribution. This money can be used by the token holders to fund the growth of the protocol. Fund grants. Fund public goods. Fund liquidity in the protocol.

How will it work?

Uniswap sets fees for each pool individually. They can try the switch on a limited set of pools and analyze the results. If the trading execution, liquidity, and amount does not decrease, the test is a success. The proposal plans two test runs on two different pools:

  • USDC / ETH @ 0.05%, initialize 1/10 “protocol fee”.
  • USDC / USDT @ 0.01%, initialize 1/10 “protocol fee”.

Last week, we looked at the USDC / USDT pool. To consider impermanent loss, we will look at the USDC / ETH pool.

A recap on impermanent loss: Uniswap liquidity providers deposit two assets for a specific trading pair into a pool (in our case USDC and ETH). The liquidity providers suffer losses when the price ratio of the pooled asset (assets he deposited in the pool) is different from the price at which he deposited. However, this loss is “impermanent”; there is a probability that the price ratio will revert. The loss only becomes permanent when the liquidity provider withdraws the funds before the price ratio reverts.

Fees of USDC/ETH Pool after the fee switch chart
Figure 1: Fees of USDC/ETH Pool after the fee switch (source: Rudy)

The USDC / ETH pool pocketed LPs $117.58 Mio. in fees since its start. The fee switch would take $11.78 Mio. out of the LPs pockets and send it to Uni’s treasury bringing the LP fees to roughly $105.81 Mio. The yield over the entire lifetime of the protocol would have been reduced by 5% in absolute terms to 47% down from 52%. The weekly yield also sees a small downwards adjustment.

Weekly Yield of USDC/ETH Pool after the fee switch chart
Figure 2: Weekly Yield of USDC/ETH Pool after the fee switch (source: Rudy)

How does this compare to impermanent loss?

A study by Bancor revealed that simply holding the coins would have made the investors better off than putting them into liquidity pools. Half of all liquidity providers suffer negative returns after fees.

Let’s take a closer look at impermanent loss. To maintain the constant product, the AMM always sells the outperforming asset and buys the underperforming asset.

The liquidity providers in the USDC / ETH pool suffered twice as much impermanent loss than fees (~$234 Mio. in impermanent loss). In total, 62% of all liquidity providers lost money. This includes lost profits on rising ETH prices and taken losses on falling ETH prices.

Since the focus of LPs is to earn a sustainable yield, we will focus on the downside. How does the loss materialize? A falling Ethereum price would create buy pressure for ETH in the pool. The price inside the pool falls slower than in the open markets. This creates arbitrage opportunities, so arbitrageurs can come in, buy ETH on the open market and sell it in the AMM to make an instant profit. This should stabilize the price in the AMM.

But in longer downturns, the price does not stabilize leaving the liquidity provider with a loss. When he exits the pool at this moment, he suffered a loss, which often is larger than his earned fees.

The classification of Uniswap according to the ITC

The UNI token is the primary token for the Uniswap decentralized exchange and plays a vital role due to the fact that it offers holders an on-chain governance functionality so that they can participate in the decision-making process on how the platform is managed and developed in the future.

Figure 3: The Uniswap Tokenbase entry (Source:

Economic Purpose (EEP): Uniswap is listed as a Settlement and Governance Token (EEP22TU03) due to its design as a means of collateral combined with governance functionality.

Industry Type (EIN): The issuer of Uniswap is active in the field of Decentralized Exchanges, Markets and Market Making (EIN06DF01).

Technological Setup (TTS): Uniswap is an Ethereum ERC-20 Standard Token(TTS41BC). The Class “Ethereum ERC-20 Standard Token” captures every Token that is implemented by means of the ERC-20 Standard on top of the Ethereum blockchain.

Legal Clam (LLC): Uniswap does not entitle its holder to any legal claim or rights against the issuing organization, therefore it is listed as a No-Claim Token(LLC31).

Issuer Type (LIT): The dimension “Issuer Type” provides information on the nature of the issuer of the token. Uniswap’s platform is built by a team of programmers and engineers that make up the core contributor community. Its Issuer Type is a Private Sector Legal Entity (LIT61PV).

Regulatory Framework (EU) (REU): The dimension “Regulatory Status EU” provides information of the potential classification of a token according to the European Commission’s proposal for a Regulation on Markets in Crypto Assets (MiCA, Regulation Proposal COM/2020/593 final). Uniswap qualifies as an Utility Token (REU52) according to the definition provided in Article 3 (5) of Regulation Proposal COM/2020/593 final.

List of Uniswap LP Tokens V2

Figure 4: Tokenbase list with top 10 Uniswap LP-tokens by total value locked (Source:

The International Token Standardization Association (ITSA) e.V.

The International Token Standardization Association (ITSA) e.V. is a not-for-profit association of German law that aims at promoting the development and implementation of comprehensive market standards for the identification, classification, and analysis of DLT- and blockchain-based cryptographic tokens. As an independent industry membership body, ITSA unites over 100 international associated founding members from various interest groups. In order to increase transparency and safety on global token markets, ITSA currently develops and implements the International Token Identification Number (ITIN) as a market standard for the identification of cryptographic tokens, the International Token Classification (ITC) as a standard framework for the classification of cryptographic tokens according to their inherent characteristics. ITSA then adds the identified and classified token to the world’s largest register for tokens in our Tokenbase.

  • The International Token Identification Number (ITIN) is a 9-digit alphanumeric technical identifier for both fungible and non-fungible DLT-based tokens. Thanks to its underlying Uniform Token Locator (UTL), ITIN presents a unique and fork-resilient identification of tokens. The ITIN also allows for the connecting and matching of other media and data to the token, such as legal contracts or price data, and increases safety and operational transparency when handling these tokens.
  • The International Token Classification (ITC) is a multi-dimensional, expandable framework for the classification of tokens. Current dimensions include technological, economic, legal, and regulatory dimensions with multiple sub-dimensions. By mid-2021, there will be at least two new dimensions added, including a tax dimension. So far, our classification framework has been applied to 99% of the token market according to the market capitalization of classified tokens.
  • ITSA’s Tokenbase currently holds data on over 4000 tokens. Tokenbase is a holistic database for the analysis of tokens and combines our identification and classification data with market and blockchain data from external providers. Third-party data of several partners is already integrated, and API access is also in development.


If you like this article, we would be happy if you forward it to your colleagues or share it on social networks. More information about the International Token Standardization Association can be found on the Internet, on Twitter, or on LinkedIn.

Nicolay Gerold is Analyst and Investment Researcher at Rudy Capital. Feel free to reach out and connect via email and Linkedin.

Christian Viehof is an Executive Director at the International Token Standardization Association (ITSA) e.V., working to create the world’s largest token database including a classification framework and unique token identifiers and locators. He completed his Bachelor in Economics at the University of Bonn, the Hong Kong University and the London School of Economics and Political Science with a focus on Behavioral Economics and Finance. Currently pursuing his Master of Finance at the Frankfurt School of Finance and Management, you can contact him via and connect with him on Linkedin, if you would like to further discuss ITSA e.V. or have any open questions.

Valentin Kalinov is an Executive Director at International Token Standardization Association (ITSA) e.V., working to create the world’s largest token database, including a classification framework and unique token identifiers and locators. He has over five years of experience working at BlockchainHub Berlin in content creation and token analysis, as a project manager at the Research Institute for Cryptoeconomics at the Vienna University of Economics and token analyst at Token Kitchen. You can contact Valentin via and connect on Linkedin if you would like to further discuss ITSA e.V. or have any other open questions.

This article was originally posted by Rudy Capital

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International Token Standardization Association

The International Token Standardization Association (ITSA) is a not for profit organization working on holistic market standards for the global token economy.