Today, after 9 months of Alpha and Beta testing and years of research on Constant Function Market Makers (CFMMs), we’re excited to announce that GammaSwap is live!

What is GammaSwap?

GammaSwap is the first-ever DeFi primitive enabling users to borrow liquidity from any Automated Market Maker (AMM) pool. Traders can use GammaSwap to speculate on volatility directionally or through a straddle on any asset. DEX Market Makers can use GammaSwap to hedge their exposure as it is the exact opposite of an AMM LP position.

The GammaSwap Labs team built this oracle-free platform with three goals in mind:

1. Offer a means for Liquidity Providers (LPs) to earn returns that are more fairly aligned with the significant risk they take in providing liquidity;

2. Boost liquidity in Automated Market Makers (AMMs); and

3. Provide LPs with the ability to hedge (i.e., protect themselves) against the risk of impermanent loss.

Let’s take a minute to walk through the existing issues in DeFi that are driving each of these goals, as well as how the GammaSwap protocol addresses them.

Aligning LP risk with LP reward

The Problem: It is well known that LPs for AMMs take on considerable risk in the form of impermanent loss. Impermanent loss (IL) is the loss Liquidity Providers experience from the rebalancing of the AMM. As the prices of the tokens in an LP position diverge from their starting ratio to each other, the LP position loses value. The higher the volatility, the higher the loss for the Liquidity Provider. IL is the equity loss of an asset in an AMM pool when compared to simply holding said asset by itself.

The risk that LPs take on is determined by price volatility, but their revenue is determined by swap volume. This is an inefficent misalignment of risk and reward. Volatility has some correlation with volume, but it is not a direct, linear relationship — and historical returns show that volume-based swap fees often fail to compensate LPs adequately for their risk of impermanent loss.

The Solution: GammaSwap addresses this issue by paying its LPs dynamic fees that change based on market volatility, rather than volume based swap fees. These dynamic fees are funded by interest rates that GammaSwap charges to traders borrowing liquidity from the platform, which increase as market volatility increases (and vice versa). So, the greater the market volatility, the higher the fees LPs earn. This helps ensure that LPs can earn higher risk adjusted rewards that are commensurate with their risk.

Addressing Low Liquidity on AMMs

The Problem: The current underpayment of AMM LPs has the additional negative effect of lowering the overall liquidity of the markets. If LPs earned more for their services and the yield scaled more efficiently with their risk, providing liquidity would be more attractive to investors hence building a more scalable liquidity model.

The Solution: The GammaSwap smart contract takes deposited tokens and uses them to provide liquidity on existing AMMs (like Uniswap), which in turn generates yield in the form of swap fees. GammaSwap then sends those yields back to the pool, in addition to the borrow fees from traders.

Liquidity Providers in GammaSwap wrapped pools will always earn a yield equal to or higher than the underlying AMM. This higher dynamic yield should provide better incentives for LPs and deepen liquidity across pools.

Creating a Hedging Mechanism for LPs

The Problem: Since market volatility and LP profits are inversely related under the existing AMM model, LPs are essentially “shorting” volatility — i.e., they profit when volatility is low and lose money when volatility is high. Since there is no existing platform for “going long” volatility through AMMs, LPs have no way to hedge or protect themselves against periods of high volatility and impermanent loss.

The Solution: GammaSwap aims to address this significant gap in the market by creating a two-sided market for trading volatility risk. Traders can borrow liquidity from GammaSwap and get leveraged exposure to any asset, without relying on an oracle. This enables traders to “go long” volatility by taking the opposite position of an AMM LP, creating the opportunity to turn impermanent loss into impermanent gain.

What Just Launched?

Our wrapped pools just went live on Arbitrum mainnet, and our first AMM integration is with SushiSwap. You can check it out here.

To learn more about how GammaSwap wrapped pools work, check out our overview post here and our documentation here.

What’s Next?

• Integrations
• Launching a Feeless Spot DEX
• Launching GammaSwap V2

Integrations

From here, we are aiming to expand the platform by integrating with all major AMMs. Our initial targets include:

• Launching pools for Uniswap V2 on Arbitrum;
• Launching on Mainnet Ethereum and providing support for Uniswap V2; and
• Integrating Balancer weighted pools.

Launching a Feeless Spot DEX

In Q4 of this year, we intend to launch our own, novel spot AMM. Since GammaSwap pools do not require swap fees to incentivize LPs to provide liquidity, we expect to be able to offer an AMM that has no swap fees. We’ll share more information on this platform and its development as we approach the end of the year.

Launching GammaSwap V2

A bit further down the line, we will be looking to launch GammaSwap V2. GammaSwap V2 will be a completely new approach to concentrated liquidity. Unlike Uniswap V3, there will be no fragmentation of liquidity; LP tokens will be completely composable, and the mechanism will be simple enough for even non-DeFi-native users to participate. As with our feeless spot DEX, we’ll share more info on this next iteration of the platform as it develops.

TL;DR

• GammaSwap is the first-ever DeFi primitive enabling users to borrow liquidity from any Automated Market Maker (AMM) pool. Traders can use GammaSwap to speculate on volatility directionally or through a straddle on any asset without relying on an oracle.
• GammaSwap provides the first and only mechanism for hedging LP positions and protecting against impermanent loss, offers its LPs higher yields and a significantly better risk/reward profile than traditional AMMs, and should increase liquidity across the entire DeFi space.
• GammaSwap launched its first wrapped pools today on Arbitrum Mainnet, with a SushiSwap integration.
• Our next steps (in order) are: deploying on more chains and growing our AMM integrations, launching a feeless spot AMM (circa Q4'23) and launching GammaSwap V2 — our novel approach to concentrated liquidity.