Explainer
Impermanent loss,
explained.
Why providing liquidity in DeFi often pays less than doing nothing at all, and the three ways Ammalgam turns that deal around.
The setup
First, what a pool is
Decentralized exchanges don’t match buyers with sellers. Instead they keep pools: big shared pots holding two tokens, say ETH and USDC. Anyone can trade against the pot at any moment, and every trade pays a small fee into it.
The pots are funded by ordinary users called liquidity providers. You deposit both tokens (say $5,000 of ETH and $5,000 of USDC) and the trading fees flow to you. Passive income from tokens that would otherwise sit idle. That’s the pitch.
But the pool has one job: always be ready to trade at the market price. To do that it constantly rebalances itself: selling ETH as its price rises, buying ETH as it falls. And it’s your deposit doing the rebalancing.
The catch
Selling winners, buying losers
Follow what that rebalancing means for you. As a token’s price climbs, the pool keeps selling it, so you steadily end up holding less of what’s winning and more of what isn’t. The drag this creates has a name: impermanent loss. It’s the gap between the two lines in the chart above: what your deposit in the pool is worth, versus what the same tokens would be worth in your wallet.
Just held
$15,000
Your ETH doubled to $10,000; your $5,000 USDC stayed put.
vs
In the pool
$14,142
The pool traded ETH away all the way up: $7,071 in ETH + $7,071 in USDC.
Why impermanent? Because the gap only becomes real when you withdraw. If the price returns to where you started, the gap closes on its own. Cash out while prices are apart, though, and the loss is permanent.
It doesn’t care about direction: a crash opens the gap just like a rally. And it grows much faster than the price move that causes it:
price move
2×
−5.7%
vs holding
price move
3×
−13.4%
vs holding
price move
5×
−25.5%
vs holding
The one thing working in your favor is time. Fees drip in every day; a big price move can land on any day. Providing liquidity is a race between the two, and adding time to the picture gives you this map:
The market today
Fees were supposed to cover it. Often they don’t.
For years the industry’s answer was: don’t worry, the fees make up for it. The data says otherwise. A study of Uniswap, the biggest exchange of this kind, found that roughly half of its liquidity providers would have made more money just holding their tokens.
Newer designs let providers concentrate their deposit around the current price to earn more fees. It works, but it concentrates the loss too, and the position falls out of play whenever the price drifts away. One analysis found providers taking on about five times the exposure to earn about three times the fees. The trade got sharper, not better.
So providers who stay in the game defend themselves by hand:
Hedge on another platform
Open an opposite bet elsewhere so price moves cancel out. It works, but you’re now paying a second platform, and the cost of the hedge often eats the very fees you came to earn.
Babysit the position
Keep moving your deposit to follow the market. Every move costs money, and mistiming a move locks losses in.
Buy “insurance”
Some protocols promised to cover impermanent loss out of their own funds. The best-known program shut down when a real crash arrived.
Notice what’s missing from that list. Liquidity providers are effectively selling protection against price swings: a real, valuable service. But nobody is paying them properly for it. The risk gets handed out; it never gets priced. It’s a market with sellers and no buyers.
What Ammalgam changes
One pool that works both sides
Ammalgam’s exchange, the DLEX, merges a trading pool and a lending market into a single thing. The same pot of tokens can be traded against and borrowed from. That one change gives a liquidity provider three new moves.
Earn more
Two incomes, one deposit
On Ammalgam your deposit earns trading fees and lending interest at the same time, because traders borrow straight from the pool and pay for the privilege. The loss doesn’t change; the income racing against it does. Ammalgam’s docs estimate 20–60% higher returns than earning one income at a time.
More income per day means the teal side of the race wins sooner.
Cancel risk
Mute the direction
Borrow the volatile token from the same pool, against your own position. Now a price move helps one half of your position and hurts the other in equal measure, so the direction cancels out. What’s left is a small, known cost, steadily outrun by fees and interest. No second platform, no separate hedge to babysit.
The steep bet becomes a flat line; then income lifts it into profit.
Switch sides
Own the other side
The move no other market offers: borrow the pool position itself. The borrower takes on the mirror image: where a provider loses on big swings, the borrower gains, in either direction. That’s impermanent gain. The interest they pay for it flows back to the pool’s providers.
One curve, two sides: the borrower’s cost is interest, paid to providers.
“We can’t eliminate risk, but we can reframe how we look at impermanent loss, and give users a choice.”
That third move is the whole story in miniature. People who don’t want swing risk can finally sell it; people who want it finally pay for it. Impermanent loss stops being a silent tax on providers and becomes a price, set by a market with both sides showing up.
The short version
- Pools rebalance automatically, so providers always end up with less of whatever is winning. The gap versus just holding is impermanent loss.
- Fees often don’t cover it: about half of Uniswap’s providers would have done better holding, and today’s workarounds are costly and manual.
- Ammalgam pays providers twice (trading fees + lending interest), lets them cancel price direction inside the same pool, or lets them switch sides entirely and profit from big moves.
- The result is the first two-sided market for this risk: sellers finally get paid fairly, buyers get exposure they couldn’t buy anywhere else.
Want to play with these numbers? Try the interactive calculator.