Why Headline APY Misleads DeFi Liquidity Providers on Real Profitability

Headline APY is often used to compare DeFi liquidity pools, but it reflects past performance rather than expected future returns for providers. Actual LP outcomes depend on trading activity, how AMMs handle volatility, incurred costs, and the value remaining after those costs. A 2025 study of Uniswap v3 data across nine pools found that nearly half of positions lost money relative to simply holding the assets, with average impermanent loss of 3.8%. The analysis excluded gas costs and covered only closed positions, so results vary by pool and strategy. Yield Basis, a leveraged pool design, aims to reduce divergence loss and automate rebalancing, though this automation does not remove economic costs.