Introduction to Providing Liquidity in DeFi via AMMs
Decentralized finance (DeFi) has transformed how investors can provide liquidity and generate yields through Automated Market Makers (AMMs). These protocols, such as Uniswap, allow users to deposit asset pairs into liquidity pools, thereby facilitating trades without traditional intermediaries. In return, liquidity providers (LPs) earn transaction fees and sometimes additional rewards, expressed as APY (Annual Percentage Yield).
However, these apparent yields must be analyzed considering specific risks, notably impermanent loss (IL) and smart contract risks. This analysis focuses particularly on Uniswap v3, which introduces the concept of “concentrated liquidity,” to evaluate the real yields and associated risks in 2026.
Uniswap v3: Explaining Concentrated Liquidity
Uniswap v3, launched in May 2021, innovates by allowing liquidity providers to concentrate their funds within specific price ranges instead of providing uniform liquidity across the entire price curve. This increases capital efficiency and potentially yields better returns for the same invested amount.
Concretely, an LP chooses a price range (for example, ETH/USDC between 1800 and 2200 USD) where their liquidity will be active. By concentrating liquidity, the LP captures a larger share of transaction fees within this range but is exposed to a higher risk of impermanent loss if the price moves outside this range.
According to Dune Analytics data (2023), concentrated liquidity can multiply fee yields by 2 to 4 times compared to Uniswap v2, but with greater volatility in position value.
Apparent APY vs. Real APY After Impermanent Loss
The APY displayed by DeFi platforms often represents only the fees generated by transactions on the pool, without adjustment for losses due to impermanent loss (IL). IL corresponds to the potential capital loss compared to simply holding the provided assets, caused by relative price changes of tokens in the pool.
For example, an LP providing 1 ETH at 2000 USD and 2000 USDC in an ETH/USDC pool will see the value of their assets evolve differently depending on the ETH price:
ETH Price (USD)
LP Value without IL (USD)
LP Value with IL (USD)
Impermanent Loss (%)
2000 (initial price)
4000
4000
0%
2400 (+20%)
4400
4266
3.0%
1600 (-20%)
3600
3466
3.8%
2800 (+40%)
4800
4400
8.3%
1200 (-40%)
3200
2933
8.3%
Source: calculations based on the classic impermanent loss formula (AMF, 2023)
To offset IL, the fees earned must exceed this loss. Thus, a gross APY of 20% can translate into an effective net yield of 12-15%, or less if volatility is high.
Detailed Calculation of Impermanent Loss
IL is calculated from the relative price change between the two tokens in the pool. The standard formula is:
IL = 1 - (2 * sqrt(R)) / (1 + R)
where R is the ratio of the new price divided by the initial price.
Example: if token A’s price doubles relative to token B, R = 2:
In other words, the LP will have 5.7% less than if they had simply held the tokens without providing liquidity.
In practice, the loss is “impermanent” because if the price returns to its initial level, the loss disappears. However, if the LP withdraws funds while the price has moved, the loss becomes permanent.
Performance and Best Pools in 2026
In 2026, pools offering the best risk-adjusted yields are those combining stable and less volatile assets or pairs with high liquidity and volume. Here is a ranking based on Bloomberg DeFi Analytics data (May 2026):
Pool
Gross Fee APY (%)
Volatility (annualized %)
Estimated Net APY (%)
Smart Contract Risk Rating
USDC/DAI (stablecoins)
8.5
1.2
8.3
Low
ETH/USDC (concentrated liquidity)
22
45
13
Medium
WBTC/ETH
18
40
11
Medium
SOL/USDC
25
55
12
Medium
MATIC/USDC
20
50
10
High
Source: Bloomberg DeFi Analytics, aggregated data as of 05/01/2026
Stablecoin pools generate lower yields but with very little IL risk. Pools combining volatile assets offer high gross APYs, but IL significantly reduces net gains.
Risks Related to Smart Contracts
Beyond classic financial risks, providing liquidity in DeFi exposes investors to specific smart contract risks:
Bugs and vulnerabilities: A bug in the code can lead to total loss of funds. For example, the Wormhole protocol hack in February 2022 caused a loss of $120 million (AMF, 2022).
Oracle risks: AMMs may rely on oracles for certain data. Manipulation can distort prices.
Governance risk: Protocol changes can alter reward rules.
Liquidity and slippage risk: In times of high volatility, liquidation can be difficult without impacting prices.
These risks encourage favoring audited and reputable protocols with active communities and strong security track records (Banque de France, 2024).
Conclusions and Recommendations for French Investors
Providing liquidity via Uniswap v3 and other AMMs represents an attractive opportunity to generate yields superior to traditional investments. Nevertheless, it is imperative to consider:
The net yield after impermanent loss, which can significantly reduce the displayed gross APY.
Selecting stable pools or pairs with moderate volatility to limit losses.
Being vigilant about smart contract risks, notably by favoring audited and high-cap protocols.
Diversifying pools to balance yield and risk.
For a French investor, prudent allocation in stable pools like USDC/DAI secures yields with a net APY above 8%, while exposure to volatile pairs should remain limited and closely monitored.
Finally, it is advised to stay informed of AMF regulatory developments concerning DeFi and to use reputable platforms for risk management.
Verdict: Providing liquidity in DeFi via Uniswap v3 can be profitable in 2026, provided impermanent loss is integrated into profitability calculations and smart contract risks are managed. A prudent and diversified strategy remains the key to success.
