Depositing a pair of assets into an automated market maker earns trading fees, yet the position can still be worth less than simply holding the same two assets. The gap comes from how the pool rebalances itself.
The pool sells the asset that is rising
An automated market maker quotes prices from a formula tied to the balances it holds. Traders take whichever side is cheap relative to the outside market, and their trades change those balances.
When one asset climbs, arbitrageurs buy it out of the pool until the quoted price matches elsewhere. The pool ends up holding less of the winner and more of the loser.
Nobody decided to sell. The rebalancing is mechanical, and it happens on every price move regardless of what the depositor believes about either asset.
The loss is measured against holding
The shortfall is defined as the difference between the value of the pool position and the value of the same starting amounts left untouched in a wallet.
That comparison matters because it is the alternative the provider gave up. A pool position can rise in dollar terms and still have underperformed the simple hold, which is why the effect surprises people who only watch the balance.
The size of the gap depends on how far the ratio between the two assets moved, not on the direction. A pair that diverges and then returns to its starting ratio leaves almost nothing behind.
Fees are the offsetting income
Every swap through the pool pays a fee that accrues to providers, so the position is a wager that trading volume compensates for the rebalancing drag.
Pairs of assets that track each other closely, such as two dollar-denominated tokens, move very little in ratio terms and generate a shallow drag, which is why they can run on thin fee tiers.
Volatile pairs create far more divergence, so they usually carry higher fee tiers to make the arrangement worth entering at all.
Concentrated ranges sharpen both sides
Newer designs let providers commit capital to a narrow price band instead of the whole curve, which multiplies the fees earned per unit of capital while the price stays inside that band.
The same concentration multiplies the rebalancing effect. Once price exits the band, the position sits entirely in one asset and earns nothing until it comes back or the provider moves the range.
That turns a passive deposit into an active one. The provider is now making a judgement about how far the price will travel, and the cost of being wrong arrives faster than in a full-range position.
Withdrawal is what makes the gap permanent
While the position stays open, the shortfall is only a comparison. Prices can move back, and a pair that returns to its opening ratio leaves the provider close to where they began.
Exiting converts the current balances into whatever they are worth at that moment, which is the point at which the rebalancing stops being reversible.