In this edition, we’re giving you the rundown on GammaSwap. After launching on Arbitrum on September 20th, the project has received some traction.
As a trading platform, GammaSwap could be an interesting addition to the active Arbitrum DeFi ecosystem. The project aims to provide value for both traders as well as liquidity providers by enabling hedging against impermanent loss.
Stay alert, stay informed⬇
Background on GammaSwap
GammaSwap is a novel DeFi primitive built to scale liquidity in AMMs by providing better risk-adjusted returns to Liquidity Providers (LPs).
Speculators can trade volatility in the markets via the platforms perpetuals in an Oracle-free manner.
The project was recently deployed on Arbitrum last month, and has accumulated ~$500k in TVL since then.
New Features and Liquidity Insights
The biggest development in GammaSwap is the launch of its first wrapped pools on Arbitrum Mainnet, with a SushiSwap integration.
The protocol is currently supporting large V2 pools including "WETH/USDC", and "MAGIC/WETH”.
There are also plans to go permissionless and launch on mainnet Ethereum to tap into more liquidity.
GammaSwap allows people to borrow liquidity from any AMM for speculative trading on volatility, Oracle-free.
The protocol’s new product "Volatility Perpetuals” differs from a regular perpetual future in that there's no delta risk.
The product aims to benefit both traders and liquidity providers, the latter of whom earn swap fees plus additional borrow fees from the borrowers.
GammaSwap seems to be turning impermanent loss, a commonly feared concept, into an upside for users.
The team aims to make LP yields scale better with impermanent loss risk.
GammaSwap Chief Degen Devin says that AMMs currently represent a one-sided volatility market and that GammaSwap can correct this inefficiency by allowing people to trade on it.
He suggests that meme coins and new, volatile projects could be good for traders seeking high volatility, but he sees opportunities for blue-chip assets as well.
For more conservative traders, GammaSwap could be beneficial if they are already using Uniswap V3 pools for a specific range.
The project currently only supports V2 pools and is exploring the idea of setting limit orders for borrowers.
V2 pools offer full-range liquidity, which means borrowers cannot set a specific price range for borrowing.
GammaSwap V3 pools are considered risky due to uncertain liquidity distribution, which could lead to unexpected liquidations for liquidity providers.
GammaSwap V2 is working on a new type of full-range liquidity that is capital-efficient and reduces risks.
Users can get Delta exposure in GammaSwap byselling one asset for another in the AMM pool.
GammaSwap supports larger pools on Sushi V2 as a result of their integration and is planning to go permissionless.
The project will soon move to the Ethereum mainnet and says the liquidity sweet spot for GammaSwap to be effective is around $50 to $100K.
While GammaSwap can technically work with any level of liquidity, $50k to $100K is the minimum recommended for larger positions. He adds that this figure will likely be displayed in the UI once they go permissionless.
Larger pools might experience lower volatility, thereby limiting the potential for a high supply APY, a form of diminishing returns.
However, larger pools offer more stable yields, which is beneficial for borrowers.
Borrowers face a time risk in GammaSwap, similar to how traders face price risk in perpetual features.
GammaSwap: Utilization, Safeguards, and Token Strategies
The utilization rate of the pool, meaning how much liquidity is borrowed out, can affect the utilization rate.
Devin has mentioned that everything remains stable until 80% utilization; after that, the origination fee and the borrowing rate increase exponentially to prevent potential attacks or manipulations.
When it comes to security, the project has undergone audits and the team has run simulations to test their mechanisms.
The team can't prevent issues related to rug tokens, but they can control against mass liquidations of borrowers.
Users have limited control over borrow rates as they are market-determined.
Users are advised to be cautious with position sizing, especially in smaller pools, which are more prone to manipulation.
Users can also check contract codes and liquidity flows to protect themselves.
The lower the liquidity and the longer the tail, the higher the risks are.
The UI will likely feature a manual search option by the pool or token address.
Pools that attain a certain level of liquidity will undergo a basic check before being whitelisted.
Being on the official UI doesn't imply endorsement, the project aims to balance user access with security, adapting based on community feedback.
Speculators may go for volatile pairs, but there are risks involved.
Users' behavior on other decentralized exchanges will likely inform how they'll use GammaSwap.
User behavior will also vary based on news-based events or other types of flows.
Zapacheenie asks about the versatility of pools, wondering if it can be any pool.
Once the pool is created, you can borrow from it. Supply APY will scale with impermanent loss risk and include at least the swap fees from Sushi, plus additional borrow fees.
Current Supply & Borrow Rates
Devin compares the borrow APRs and features, comparing them to those of GMX.
This is because there is no funding fee; the borrow rate scales with volatility.
Their platform could be an interesting option for traders looking for more delta protection or less leverage, as well as a hedging tool.
Devin describes the exposure as "convex" similar to a perpetual option.
He says it's suitable for traders interested in options, features, and DeFi.
The platform could be beneficial in markets with big price swings but may not be as advantageous in sideways markets.
Oracles, Gas Fees, and Future Developments
GammaSwap measures debt based on the product of the x*y=k formula, which reflects the liquidity provided.
This system invalidates the need for an Oracle and defends against certain types of flash loan attacks.
Oracles can be problematic but Devin acknowledges that they could potentially offer increased leverage. He describes it as a balancing act between different factors.
GammaSwap is deployed on Arbitrum, where the gas cost is low, and their plans to launch on mainnet Ethereum.
Recognizing the significance of gas costs, the team is making design changes to further reduce these fees.
High gas costs can be psychologically preventative for retail investors.
Small positions become untenable due to high gas fees; this may cause users to delay or avoid closing positions.
L2 solutions might absorb some of this activity due to lower gas costs.
Different products and trading strategies might adapt to the gas-cost environment.
The team has been running tests and simulations to ensure robustness when it comes to expansion.
Right now they are focusing on Mainnet due to a large number of asset pairs available; they might deploy to other L2 solutions based on asset pairs and activity.
The team has previously voiced plans to deploy to BNB Chain.
Devin has mentioned that the team has looked at other AMMs like Uniswap V2 and PancakeSwap, and also considered integrating with Balancer.
The aim is to be on Mainnet and possibly Balancer by the end of the year, with more announcements to come.
GammaSwap going permissionless could happen in the next couple of weeks, but moving to mainnet might take longer.
The team is focusing on optimizing smart contracts to reduce gas fees.
The contracts are not undergoing any critical changes but are being made leaner to suit the constraints of the mainnet.
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