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Shipyard Software's 2023 LP Report

Shipyard Software's 2023 LP Report compiles survey data and in-depth interviews with LPs, highlighting their challenges, strategies, and outlook for DeFi's

Written by

Mark Lurie

Published on

December 21, 2023

Executive Summary

Shipyard Software’s 2023 LP Report presents the findings and insights gained from my in-depth conversations with dozens of liquidity providers (LPs) over the past quarter. The quantitative results presented in this report are derived from survey responses from verified LPs across DeFi, most of whom were not (yet) Clipper LPs. Shipyard is committed to understanding the LP experience, especially the challenges and successes they have faced in navigating the ever-evolving DeFi landscape.

3 Key Takeaways From LPs in 2023

  1. 🔥 LPs Feel Burned: Many LPs have withdrawn from the ecosystem or significantly reduced their positions citing poor investment performance, insufficient incentives, and a lack of transparency from protocols.
  2. 🌟 Emphasis on Profitability: LPs are no longer interested in shitcoin liquidity incentives. Instead, the LPs who remain in DeFi are focused on return on capital. This shift suggests that DeFi’s remaining  LPs are growing more discerning and risk-averse, seeking out more sustainable and consistent earning models.
  3. 🔀 Flight to Quality: stETH is the new “risk-free return” in LP cost of capital calculations. In addition to simply staking and earning, LPs preferred correlated asset pairs–another source of safety in a market still recovering from the shocks of 2022.

Capturing the voices and perspectives of LPs is part of Shipyard’s mission to build specialized, elegant DEXs for every type of trade, trader, and instrument. By sharing our findings with the wider community we’re hoping to engage in a broader conversation about what we want the future of finance to look like.

- Shipyard CEO, Mark Lurie

Why LPs Matter

Liquidity pools are the backbone of DeFi. Without LPs, decentralized trading and lending would grind to a halt, ceding the space to centralized exchanges and traditional financial institutions. LPs are central to keeping DeFi open to everyone with access to an internet connection. Their experiences should matter to everyone who believes in DeFi. 

Nearly a quarter of surveyed LPs kept their powder dry in 2023

💡 State of DeFi in 2023

  • According to the most recent data, the Total Value Locked (TVL) in DeFi has reached $52.71 billion. This marks a return to the highs we saw earlier in the year, thanks in large part to a surge of activity in November and December.
  • DEXs held the top spot in DeFi with deposits amounting to $19.4 billion, followed by lending and borrowing protocols which had a TVL of $13.7 billion
  • Overall, TVL in DeFi was relatively flat in 2023, hinting that mainstream investors are still skeptical of the crypto ecosystem writ large, due in part to CeFi’s rocky past 14 months. 
A near-majority of LPs surveyed kept their positions neutral throughout the year

Survey Results

🔒 Correlated Pairs Provided Refuge: Throughout our interviews, LPs repeatedly noted a strong preference for pools with correlated pairs (e.g., ETH <> OP) over those with uncorrelated assets (e.g., ETH <> USD). Survey results showed 68% of respondents preferred pools with correlated pairs and especially stablecoins, whereas 28% indicated a preference for uncorrelated assets, and only 14% preferred more volatile pools. In general, correlation was viewed as implying some modicum of protection from impermanent loss.

68% of respondents preferred pools with correlated pairs, especially pairs involving stablecoins.

🥇 No Strong Favorites: There was no clear DEX winner in our interviews and no single dominant platform cited by survey respondents. Rather, LPs are spreading their capital across various DeFi protocols to mitigate risks associated with any single platform.

Very few LPs were up big in 2023

But LPs Favored Projects with Strong Communities: Projects with active and engaged communities signaled stability and reliability, according to LPs surveyed. Community support often translates into a more robust and resilient ecosystem. While having a strong community doesn’t guarantee a protocol's legitimacy, it does send a strong signal to LPs compared to projects with less community support. 

🔀 Asset Allocation Trends: No single asset emerged in the survey as the preferred benchmark for measuring returns, however, most LPs did consider their performance relative to other crypto assets. Anecdotally, when pushed to choose a benchmark, LPs tended to say ETH. Despite its ability to command news cycles, BTC was not a popular asset among DeFi LPs. We found in both interviews and survey responses that LPs are generally underweight BTC, indicating a belief in the long-term potential of Ethereum, especially with its evolving L2 ecosystem and technological upgrades, over Bitcoin's primarily store-of-value proposition.

ETH & sETH may be the emerging benchmark assets of DeFi

😃 High Long-Term Optimism: While 2023 was a mediocre year for most LPs, they were still slightly bullish in their 6-12 month outlook and extremely enthusiastic about ETH’s long-term prospects. This cautious optimism could be influenced by market recovery expectations or confidence in the resilience of the DeFi sector. Long-term optimism is high - as would be expected with this group - with nearly 60% of LPs very bullish on ETH in the 5-year time-frame.

Trends that aren’t going away

  1. 🤖 Dominance of Quantitative Players: The DEX landscape is increasingly dominated by quantitative players, such as hedge funds and algorithmic traders. This trend suggests a professionalization of the space. It also indicates that sophisticated strategies and more computational resources are key to success.
  2. Low Exposure to Altcoins: Despite rallies at the end of 2023, LPs were not enthusiastic about altcoins. This cautious approach could stem from a risk-averse stance in an uncertain market or a preference for more established currencies with substantial liquidity and lower volatility.
  3. 🤸🏽 Rebalancing Is Coming: LPs are interested in reducing risk and maximizing returns. Rebalancing strategies do both while providing LPs a mechanism to reassess their positions regularly. Whether managed manually or automatically, rebalanced LP portfolios are here to stay. However, rebalancing at systematically bad prices, which creates impermanent loss, is no longer an effective sleight of hand.

What has LPs excited in 2024…

L2s - and their ecosystem growth opportunities - are bouying LP hopes in 2024

And beyond?

Unsurprisingly, LPs see a major role for blockchain in finance in the coming years.


The presence of LPs is crucial for the efficient functioning of DeFi protocols. They help reduce slippage, enhance market stability, and enable the creation of new financial products and services. LPs also contribute to the price discovery process and play a vital role in ensuring the overall health and sustainability of the DeFi ecosystem.

The trends outlined in this report indicate a maturing DeFi landscape where participants are becoming more strategic and risk-conscious. The increasing dominance of quantitative players suggests that liquidity provisioning is evolving into a more sophisticated and competitive field. Meanwhile, the shift in benchmarking practices and asset allocation preferences reflects a deeper integration and reliance on the broader market dynamics.

As the DeFi space continues to evolve, LPs face many challenges and some tantalizing opportunities. They must carefully manage their risks, including impermanent loss and smart contract vulnerabilities, while adapting to unpredictable market conditions and regulatory developments. By navigating these complexities, LPs contribute to the growth and innovation of decentralized finance, shaping its trajectory.

Written by

Mark Lurie

Published on

December 21, 2023

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