Learn how to use a liquidity pool impermanent loss calculator to avoid costly mistakes in DeFi. Understand when fees cover losses, which pools are safe, and how to make smarter liquidity decisions.
AMM Loss: What It Is, Why It Happens, and How to Avoid It
When you provide liquidity to a automated market maker, a decentralized exchange protocol that uses math instead of order books to set prices. Also known as AMM, it lets you earn fees by locking up crypto pairs like ETH/USDC. But there’s a hidden cost: AMM loss, the temporary drop in value you experience when the price of your deposited assets shifts. It’s not a hack or a scam—it’s math in action.
AMM loss happens because these systems rebalance your holdings automatically. Say you put in 1 ETH and 2,000 USDC into a pool. If ETH spikes to $3,000, the AMM sells some of your ETH to keep the ratio balanced. You end up with less ETH than you started with—even if the total value of your position went up. That gap between what you’d have held versus what you got back? That’s AMM loss. It’s called impermanent loss, the technical term for the value difference caused by price volatility in liquidity pools. It’s only "impermanent" if the price returns to where it started. Most of the time, it isn’t.
This isn’t just theory. Look at projects like Wombex Finance, a DeFi platform that runs liquidity pools on Binance Smart Chain, or Baryon Network, a nearly dead DEX with almost no trading volume. If you provided liquidity to a low-volume pool like Baryon, even small price swings could wipe out your gains. Meanwhile, high-volume pools like Uniswap’s ETH/USDC have smoother price paths, making AMM loss less painful. But even there, if you’re staking volatile tokens like new meme coins or obscure DeFi tokens, you’re playing Russian roulette with your capital.
Some people think AMM loss is unavoidable. It’s not. You can reduce it by sticking to stablecoin pairs—like USDC/DAI—or tokens that move together, like ETH and stETH. Avoid pools with wild price swings, especially if the token has no real use case or trading volume. Check the pool’s fee structure too. Higher fees (like 1% or more) can offset losses faster. And never assume your rewards will cover the loss—many new DeFi projects promise 100% APY but deliver zero volume and massive impermanent loss.
The posts below show exactly how this plays out in real crypto projects. You’ll see how Looping Collective, a token with no exchange listings or community, could have wiped out liquidity providers. You’ll learn why the Bird Finance, a failed airdrop project left people with worthless tokens after liquidity drains. And you’ll find out how DeepBook Protocol, a true on-chain order book on Sui, avoids AMM loss entirely by not using automated market makers at all. These aren’t abstract lessons—they’re survival guides for anyone who’s ever deposited crypto into a DeFi pool and wondered why their balance dropped.
