1inch Warns LPs: High APY May Not Be What It Seems

Liquidity providers are being urged to rethink their approach to returns as they effectively sell volatility in exchange for fees, according to 1inch. The firm argues that headline APY and trading volume can obscure the risks embedded in automated market making.

In a traditional liquidity pool, LPs can lose up to 25% of their potential gains due to impermanent loss and loss-versus-rebalancing. This is especially true when markets move rapidly, as seen in recent times.

The problem is further exacerbated by the fact that high trading volume and displayed APY can be misleading, particularly when arbitrage flow captures stale pricing or token emissions subsidize returns instead of sustainable activity.

To mitigate these risks, 1inch recommends reviewing position size against downside scenarios, comparing performance with simply holding the same assets, and periodically revoking unnecessary permissions. By doing so, LPs can better assess what they are being paid to accept and make more informed decisions.