Fluid DEX, a rising decentralized exchange in the DeFi space, has recently grabbed attention due to significant losses reported by liquidity providers in its USDC-ETH pool, amounting to around $19 million due to the platform's rebalancing mechanism.

This incident has sparked a debate within the DeFi community, shedding light on concerns regarding transparency and accountability in safeguarding users’ interests.

The launch of Fluid DEX in October 2024 coincided with an ETH price of approximately $4,400, offering to generate liquidity at a ratio of up to $39 for every $1 TVL, attracting many LPs to contribute liquidity to pools such as USDC-ETH.

However, as ETH's price dropped below $1,400 in early 2025 and currently fluctuates around $2,550, LPs experienced substantial impermanent losses. Fluid's report attributes these losses mainly to the pool's automatic rebalancing mechanism, which was designed to maximize profits.

Despite the mechanism's effectiveness in stable market conditions, high volatility triggered rebalancing, causing losses due to the price shift from around $3,800 to $1,560, and eventually to $2,340. LPs incurred realized losses exceeding fee income.

Rebalancing mechanisms in AMMs like Fluid adjust the pool's asset ratio automatically to maintain balance, ensuring stable liquidity and enhancing trading fee income, especially in high-volume pools. However, significant risks exist, particularly in volatile pools like USDC-ETH, where price fluctuations lead to impermanent loss, potentially causing LPs to lose more compared to holding assets outside the pool.

Dune Analytics data illustrates a considerable drop in Fluid Vault's TVL, resulting in LPs facing cumulative losses totaling $19 million by mid-May 2025.

Tensions escalated when DefiMoon publicly criticized Fluid for allegedly failing to warn users about the rebalancing risks, emphasizing the platform's heavy promotion of the pool without adequate disclosure of associated risks.

Samyak Jain, co-founder of Fluid, defended the platform, highlighting the strong performance of Fluid's stablecoin pools and denying the $19 million loss figure. He attributed the losses to general market volatility rather than a flaw in Fluid itself.

In response to the crisis, Fluid proposed a compensation plan offering 500,000 FLUID tokens, valued at $2.6 million, with a one-year vesting period for affected LPs.

The Fluid DEX incident serves as a cautionary tale for the DeFi community, emphasizing the necessity of understanding risks before participating in liquidity provision for any pool.