Paper: arXiv 2604.22069

Authors: Andrey Urusov, Rostislav Berezovskiy, Anatoly Krestenko, Andrei Kornilov

Abstract

The emergence of Concentrated Liquidity Market Makers (CLMMs) has made liquidity provision on decentralized exchanges an active and risk-sensitive task. However, the standalone profitability of liquidity provision remains unclear for liquidity providers (LPs) who neither hedge their inventory risk nor receive off-pool profits. This paper studies the actual outcomes of LP activity using historical transaction-level data from WETH/USD liquidity pools on the Base chain across the Uniswap, Aerodrome, PancakeSwap and SushiSwap protocols. We propose a methodology for reconstructing LP PnL dynamics from on-chain events and introduce an original metric that captures both the terminal state of LP capital and its path over time. Based on this framework, we estimate the share of successful LPs, classify their behavior and develop a taxonomy of 15 position types as structural components of PnL. We further identify a distinct class of multi-LPs operating across several pools and show that the dominant profitable position configurations are concentrated around the current pool price. The results show that only about one out of six LPs avoids losses in the selected market segment, raising an open question about the true economic motives of LP participation. Evidence also suggests that successful LPs often close positions before the full range is traversed, making observed behavior closer to profit-target-based strategies.

Complexity vs Empirical Score

  • Math Complexity: 3.5/10
  • Empirical Rigor: 6.0/10 (capped from 8.0: no out-of-sample test; see penalty flags)
  • Quadrant: Street Traders — practical and empirical, lighter on theory

Why this score: The paper focuses on the rigorous reconstruction of PnL dynamics from high-frequency on-chain transaction data and the empirical classification of participant strategies, rather than deep mathematical derivation. The methodology is highly data-driven and backtest-oriented, centering on empirical performance assessment of liquidity providers.

Research Flowchart

  flowchart TD
    A[Research Goal: Assess standalone profitability of CLMM Liquidity Provision] --> B[Data Inputs: Transaction-level data from WETH/USD pools on Base chain]
    B --> C[Methodology: Reconstruct LP PnL dynamics & terminal capital metrics]
    C --> D[Computational Processes: Classification of 15 position types & multi-LP behavior analysis]
    D --> E[Outcome 1: Only 1 in 6 LPs avoid losses]
    D --> F[Outcome 2: Successful LPs use profit-target strategies near current price]