Curriculum·J303 Liquidity Provision and Impermanent Loss·about 32 min
Pool selection
By the end of this lesson you can
- →Explain why a pool's advertised fee yield overstates what a passive provider receives
- →Separate benign flow from informed flow and identify who captures each
- →Apply the seven selection questions this course produces
- →State the conditions under which a liquidity position is a reasonable position to hold
Junior · enrolled learners
This lesson opens with The just-in-time liquidity paradox.
- What happened
- This is a research finding rather than a named incident, and it is labeled as such. Just-in-time liquidity is the practice of depositing a large amount of liquidity into a pool in the same block as a large pending trade, collecting the fees from it, and withdrawing immediately afterwards. Researchers modeling the practice found that a provider depositing liquidity equal to 90 percent of pool depth collects 90 percent of that trade's fees, leaving passive providers with minimal compensation. Their central result is that these providers selectively serve uninformed traders while avoiding informed ones, which crowds out passive providers and, within identifiable parameter ranges, can cause aggregate liquidity to fall or freeze entirely, outcomes that would not occur without them present. They propose a two-tiered fee structure allowing such providers to share fee revenue with passive ones.
- The decision point
- The passive liquidity provider ends up on the wrong side of a sorting. Uninformed flow is the profitable flow, and it is the flow that just-in-time providers compete for and largely capture. Informed flow is the flow that costs money, per J303-02's loss versus rebalancing, and it is the flow that nobody competes for, so passive providers absorb it in full. The advertised yield is computed on all the fees in the pool, and a passive provider receives a diluted share of the good half and the entirety of the bad half.
What you will be able to answer
- →What does just-in-time liquidity do to a passive provider?
- →Why does an advertised pool yield overstate what you receive?
- →Which flow costs you money?
- →What are the two conditions for a defensible position?
Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.
It is free. We do not sell the list and there is nothing to buy at the end of it.
Sources and review
- https://arxiv.org/abs/2311.18164
- https://arxiv.org/abs/2208.06046
- https://arxiv.org/abs/2205.08904
- https://cryptoslate.com/new-report-shows-50-of-uniswap-v3-liquidity-providers-are-losing-money/
Confidence medium·Volatility medium·Reviewed 2026-08-06·Owner unassigned
Contested
The 90 percent capture figure is an illustrative case within the model rather than a measured market average, and observed just-in-time activity is concentrated in particular pools rather than universal. Marked medium confidence. The direction of the effect is the durable claim; the magnitude in any given pool is an empirical question the reader should check.
Whether just-in-time liquidity is net harmful is contested. It does improve execution for the trader it serves, per J302-02, and the paper's own remedy is a fee-sharing structure rather than a prohibition. This lesson addresses only its effect on a passive provider's expected income.