Fluid DEX Faces Backlash Over 50% Liquidity Losses

Fluid DEX, a decentralized exchange, has recently faced significant backlash from liquidity providers (LPs) in its USDC-ETH pool. The platform's rebalancing mechanism, designed to optimize profits, has been criticized for causing substantial losses, particularly during periods of high volatility in the price of Ethereum (ETH).

Launched in October 2024, Fluid DEX attracted many LPs with promises of high liquidity generation. However, the sharp decline in ETH's price, which dropped below $1,400 at one point and now hovers around $2,550, has led to severe impermanent losses. The platform's automated rebalancing mechanism, which adjusts the pool’s asset ratio to maintain a balanced value, has been identified as the primary source of these losses. According to Fluid's report, the rebalancing process, which occurs gradually through trades routed via the pool, has incurred realized losses for LPs that outweighed fee income.

Rebalancing mechanisms in automated market makers (AMMs) like Fluid are designed to ensure stable liquidity and optimize trading fee income. However, in volatile pools like USDC-ETH, these mechanisms can trigger impermanent loss, where LPs may suffer losses compared to simply holding the assets outside the pool. This risk is significant, especially when asset prices fluctuate heavily.

Tensions escalated when a DeFi news provider publicly criticized Fluid for failing to warn users about the rebalancing risks. The provider claimed that Fluid heavily promoted the pool, promising high yields and even suggesting it could surpass Uniswap, one of the top DEXs. However, they alleged that the platform barely mentioned the rebalancing risks, leaving many inexperienced LPs with heavy losses. Samyak Jain, co-founder of Fluid, defended the platform, emphasizing that Fluid’s stablecoin pools are still performing well and continue to generate strong returns for LPs. He also denied the $19 million figure, claiming the ETH-USDC pool only suffered “partial loss” due to general market volatility, not due to any flaw in Fluid itself.

In response to the backlash, Fluid proposed a compensation plan to support affected LPs. The platform offered 500,000 FLUID tokens, worth $2.6 million, with a one-year vesting schedule. This move aims to mitigate the losses incurred by LPs and restore confidence in the platform. The Fluid DEX case serves as a warning to the DeFi community, highlighting the importance of understanding risks before providing liquidity to any pool. It underscores the need for transparency and accountability in protecting users from potential losses in volatile markets.