Liquidity providers (LPs) have long accepted impermanent loss (IL) as a necessary evil of participating in automated market makers (AMMs). It’s the quiet killer of yield because it’s hard to quantify in real-time, often misunderstood, and deeply embedded in the mechanics of every AMM pool. But what if the model is flawed not in function, but in philosophy? What if instead of bracing for impermanent loss, LPs could position themselves to benefit from it?

Ammalgam takes a different approach to impermanent loss. Instead of only earning swap fees for taking on market-making risk, LPs can also rent out that exposure to others and earn additional yield. We call what the renters get Impermanent Gain. It doesn’t remove impermanent loss as you still carry that risk, but it creates a new income stream on top of it.

Here’s how it works: Alice provides liquidity on Ammalgam, taking on volatility risk in exchange for swap fees. She can also lend out her market-making position, charging a fee to anyone who wants that exact exposure. Bob might borrow Alice’s position to get leveraged exposure to price movements (impermanent gain). Bob pays an ongoing fee for the privilege, while Alice keeps both the swap fees and the rental income. The exposure never leaves Alice, but she is monetizing it in a way that wasn’t possible before.

Let’s look at how impermanent loss works, why it persists, and how Ammalgam’s meta-AMM architecture creates a new dynamic by giving LPs better fee capture and capital efficiency, while opening up a new path for others to profit from volatility by borrowing market making exposure.

Impermanent Loss: A Persistent Drag on LP Returns

Impermanent loss is what happens when you provide liquidity and miss out on gains you would've had by just holding the tokens. It’s not “loss” until you withdraw, but by then, your position may be worth less than if you did nothing even after adding in the fees you earned.

Why? Because most AMMs auto-rebalance. When one token pumps, the pool sells it off and buys the one going down. You end up holding more of the loser and less of the winner. The bigger the price swing, the worse it gets.

For example, if ETH rises 50% in a 50/50 ETH-USDC pool, an LP could lose roughly 2.5% versus simply holding ETH and USDC. The effect compounds not only in volatile environments but also with concentrated liquidity. That’s a dynamic many LPs underestimate. Even if trading fees offset part of the loss, the net ROI can still end up negative.

According to a 2021 study by Topaze Blue and Bancor:

• Nearly half of Uniswap v3 LPs lost money even after fees.

• Those who stayed in during volatile periods saw up to 30% losses over 90 days compared to just holding.

Most AMMs just accept this risk as part of the deal. LPs take the hit so traders get good prices. That’s the trade-off but it doesn’t have to be.

Where AMMs Fall Short

Traditional AMMs are:

• Price-takers, not price-setters.

• Deterministic, not adaptive.

• Isolated, can’t coordinate or optimize across different risk levels, timeframes, or pricing conditions.

Uniswap v3 gave LPs more control but not more protection. By concentrating liquidity, LPs can earn higher fees, but impermanent loss actually gets worse, and they’re still left managing exposure themselves or relying on a bot.

The deeper issue? AMMs don’t adapt. They don’t care where price came from or where it’s going. That makes them vulnerable in volatile or uncorrelated markets, where price swings between assets amplify impermanent loss. In highly correlated pairs like stable-to-stable or LST-to-ETH - the effect is smaller. In most other markets, it’s a persistent drag.

Ammalgam: A Smarter Way to LP

Ammalgam rethinks this at the protocol level. It gives LPs a way to earn from real market activity by routing fees and risk where they make the most sense.

Core Components:

1. Quadratic Fees: Penalizing Exploitation, Not Participation

Instead of letting bots siphon off value through arbitrage, Ammalgam uses quadratic fees to make aggressive price movements more expensive. The bigger the move, the higher the cost. We calculate quadratic fees by squaring the size of the trade, meaning costs grow faster than the trade itself.

It makes toxic trades expensive while still allowing real trading activity. So value stays with the protocol and doesn't leak out to bots and external arbitrageurs.

2. Dual Purpose Pools: Lending and Trading in One

In most DeFi protocols, assets either earn lending fees or trading fees but not both. Ammalgam’s Dual Purpose Pools change that. LPs earn from lending and trading at the same time, with no need to split capital across multiple platforms. More yield. Less friction.

3. Concentrated Exposure with Leveraged Liquidity

Uniswap V3 boosts returns by concentrating liquidity but it comes with higher risk and the need for constant rebalancing. Ammalgam takes a different approach: LPs can use leverage within Dual Purpose Pools to increase exposure without as much managing narrow ranges.

4. Slippage-Aware Lending and Tranche Limits

Ammalgam prices collateral and debt directly from its own AMM reserves, factoring in slippage when setting loan-to-value limits. Small loans are not affected, but large loans are capped to prevent liquidations from draining protocol liquidity. This makes flash loan manipulation attacks like those on C.R.E.A.M. and Mango unworkable.

Tranche limits add another safeguard by grouping liquidity into large “ticks” that track potential liquidations across the whole range. This stops oversized positions from being split across wallets to bypass limits, reducing the risk of cascading liquidations.

The Math Behind Impermanent Gain

Ammalgam isn’t trying to predict market movements. LPs earn from fees, not price direction. The protocol’s mechanics focus on capital efficiency and protecting LPs from unnecessary exposure - not giving them a directional bet.

If you want volatility exposure, you can borrow it. If you don’t, you can earn from others who do.

Let’s say you’re providing liquidity in an ETH/USDC Dual Purpose Pool.

ETH jumps 15% on ETF news. Normally, that would hurt because the pool rebalances and sells ETH as it pumps. But on Ammalgam, borrowers pay you for taking on that risk, turning volatility into an income stream.

They borrow exposure to ETH volatility. You get paid for providing it. The result? While you may still experience impermanent loss, you’re now earning additional yield from that same risk.

Why This Matters in DeFi

DeFi's liquidity layer is flawed if LPs routinely lose money. No system can run on user loss, especially when protocols are trying to attract long-term capital.

By reframing volatility as profit potential, LPs earn from actual trading and borrowing activity. That’s the shift: from paying people to park capital to designing a system where it makes sense to stay without promises of unrealistic APRs.

Looking Ahead: From Impermanence to Performance

Many LPs avoid volatile assets or exit pools during market swings. Ammalgam builds for the ones who want to earn from volatility, not dodge it.

We can’t eliminate risk but we can reframe how we look at impermanent loss and give users a choice: take on exposure and get paid for it, or lend it out to someone who will.

Explore the docs to dig deeper into the math behind the protocol.