Fluid ETH-USDC Pool Erupts in Controversy: $8.5M Losses Undermine Protocol

Fluid’s flagship ETH-USDC Automated Market Maker (AMM) pool has incurred more than $8.5 million in cumulative losses since its December 2024 launch, according to researcher Dan Robinson. The root cause involves a rebalancing mechanism widely deemed both suboptimal during volatile periods and fundamentally flawed even during periods away from scheduled rebalancing intervals.

The Flawed Design

The September 2024-introduced pool aimed to automatically rebalance liquidity when ETH’s price deviated by ±10%. This mechanism initially appeared functional during calmer markets. However, as ETH prices swung sharply from ~$3,800 to below $1,560 and then back to near $2,400, the rebalancing process proved detrimental to liquidity providers (LPs), offsetting any modest trading fee revenue.

Analysis reveals persistent negative LP profit and loss (PnL), occurring constantly rather than merely during scheduled rebalances. This contradicts the core economic hypothesis that trading fees within the concentrated liquidity AMM structure would sufficiently offset rebalancing-induced capital losses. The design seems to have inadvertently enabled arbitrageurs to extract value, bleeding LPs over extended periods, even in low-volatility environments.

A Firestorm of Criticism

Following a May 11 governance post outlining the losses, Fluid co-founder Samyak Jain became the target of scrutiny. Sorella Labs CEO 0xvanbeethoven observed that LPs effectively subsidized arbitrageurs without commensurate benefit.

Critics argue the issue transcends mere rebalancing frequency. They contend that arbitrageurs possess structural advantages against LPs in this specific design. Proposed solutions, such as narrowing the rebalancing band from ±10% to ±7.5%, face criticism as exacerbating losses through greater capital concentration and increased frequency of rebalances. Uniswap researcher Xin Wan’s comments on historical markout data serve as a central point in Fluid’s defense.

Fluid V2: Hopes, Hurdles, and Compromises

A planned upgrade, Fluid v2, anticipated in June or July, promises dynamic fees, permissionless pools, and customizable LP ranges, potentially addressing deeper architecture flaws. While acknowledging “multiple potential solutions,” the team points towards concepts like Angstrom for enhanced LP control.

Interim proposals to affected ETH-USDC LPs involve dispersing 500,000 FLUID tokens (representing 0.5% of supply) over a period and providing $400,000 monthly rewards until the new version debuts.

However, the proposed band narrowing carries significant theoretical risk for LPs concentrating capital, as the primary FLUID v1 DEX underperformed during substantial market movements compared to established rivals like Serum.

Broader Implications

Despite Fluid citing its own LP position as proof of commitment while highlighting successes with correlated pairs, the trust among liquidity providers has suffered a considerable blow. David Kamenev, Chief Operating Officer, acknowledged the challenge while expressing openness to diverse potential fixes. The ETH-USDC loss saga presents a systemic test for Fluid’s value proposition and the delicate balance between capital efficiency and risk management.

The pool’s significant loss serves as a stark illustration of how rigid strategy design interacts with market volatility, potentially evaporating innovations that otherwise promise enhanced capital efficiency.