How to Turn Uniswap Slippage into Profit for Liquidity Providers

We calculated monthly losses that Uniswap had suffered from slippage for the past 3 months. We’re presenting the findings to highlight the unsolved problem.

What is a DEX?

Nowadays, decentralized exchanges, or DEXes, account for a substantial part of the cryptocurrency trade market. The growth of DEXes at the expense of centralized exchanges has come about for a number of reasons. In particular, DEXes provide their users with anonymity — there is no need to verify their account or provide personal data and documents like on centralized exchanges. Which, by the way, corresponds with the core principles and ethos of the crypto community.

Besides, DEXes guarantee instant liquidity for their trading pairs. There is no need to wait for hours, and sometimes even days, for your order to be executed. Thanks to the liquidity, provided by third parties, and mechanisms for automated market-making, there is no problem purchasing assets just in a few minutes.

Earning with Uniswap

For owners of crypto assets, there is a great opportunity to earn revenue by providing liquidity (aka LP’ing) to DEX pools. Fees from trades are spread among all the liquidity providers. For example, on Uniswap for the last month alone for the WETH/USDT pair, more than $3M was paid in fees. Also, some DEXes incentivize LPs with native DEX tokens. Such tokens grant the right to participate in the platform’s governance. Or they can just be sold. So, why not earn some passive income by LP’ing?

Almost perfect

But, despite the obvious pros, DEXes have some disadvantages to CEXes, which can have a negative financial effect for both LPs and users of such exchanges.

One of the main issues is impermanent losses. In essence, when the price of an asset on global markets changes, on DEXes it remains the same until someone arbitrages it. And such arbitrage can temporarily reduce the amount of liquidity in the DEX token pool.

Another negative factor, which directly affects the users of DEXes, is slippage: the difference between the estimated transaction costs of buying and selling the asset and the actual transaction costs.

How Uniswap loses money

We undertook research into the extent of slippage on the most popular DEX platform — Uniswap. And the results were quite astonishing.

In October, losses due to slippage were more than $66M. This is only for the most popular trading pairs.

Trading pairs with low liquidity primarily suffer from slippage. Thus, the WETH/CBIX7 pair was the leader in terms of the percentage of slippage in October. The size of the slippage was over 30%. On average, Uniswap users overpaid $9,766 per trade on this trading pair. And this is only with 19 transactions carried out per month.

But popular trading pairs are also not insured against losses on slippage. For example, in the WETH/USDT pair, on which more than 278K trades were made last month, the total slippage was almost $7M. In other words, by trading USDT to WETH and vice-versa, users overpaid almost $7M.

Speaking about the most popular trading pairs, with a $6.26B monthly turnover, user overpayments as a result of slippage amounted to $66M. That’s 3.5 times more than was paid in commission for the same period — $ 18M. Thus, slippage is a serious problem for DEX users.

In comparison to September, the level of slippage dropped. But October was marked by a hacker attack on Harvest, which influenced other DEX platforms. For example, the amount of slippage in trading pairs WETH/USDT and USDC/WETH during the attack equaled $1.3B. It is 100 times more than the slippage of the same pairs for the rest of the month which amounted to $12M.

Rough calculations show that for a year of trading on Uniswap, the total amount of user losses due to slippage could be about $2B.

Turning losses into income

Considering the ever-growing popularity of DEXes for crypto exchange operations, the real picture could be far more dramatic. The mechanisms for balancing the value of assets on DEXes require either significant improvement or implementation of specialized solutions and services that can mitigate possible losses.

Our team is developing Peanut — an automated price balancer for DEX platforms. Because of its unique multi-level structure, Peanut allows for minimizing slippage on DEXes even during active trading. With Peanut, 90% of the LP liquidity goes directly into the Uniswap pool. The other 10% goes into Peanut protocol, to serve as a price balancer. When large buy/sell orders are placed, the Peanut pool automatically and simultaneously makes a corresponding trade on two levels i.e. on other DEXes and CEXes.

At the same time, all of Peanut’s processes are automated at the smart contract level. This allows for avoiding possible problems connected with the risk of human error. Its native token is used for the distribution of profits from operations, for rate adjustments, and for supplying liquidity providers with additional bonuses.

Thus, Peanut allows not only for the reduction of slippage for DEX users but also increases the income of liquidity providers. The only entities who may be economically disadvantaged by Peanut are arbitragers. But, hey, who cares? :)