This paper provides the first comprehensive empirical analysis of liquidity provider (LP) behavior in decentralized exchanges (DEXs), focusing on Uniswap v2 and v3. Using on-chain data from Ethereum, the authors construct LP portfolios and simulate returns to understand how LPs behave and perform. The study reveals that LPs in Uniswap v3 actively manage their positions by adjusting price ranges, contrary to the passive assumption in many theoretical models. However, despite this active management, median LP returns are near zero after accounting for gas costs and impermanent loss, with most LPs underperforming simple buy-and-hold strategies.

The paper identifies that LP returns are heavily influenced by pool characteristics such as trading volume and volatility. Sophisticated LPs, who constitute a small fraction of all LPs, dominate liquidity provision and earn most of the fees, while retail LPs often incur losses. The findings highlight the challenges of profitable liquidity provision in DEXs and suggest that the majority of LPs would be better off with passive investment strategies. This research contributes to the growing literature on decentralized finance (DeFi) by providing empirical evidence on the behavior and performance of LPs, with implications for market design and investor education.