Introduction

Since DeFi summer, it has been overwhelmingly clear that decentralized finance has unique advantages over TradFi, enabling anyone in the world to access financial services permissionlessly and generate wealth.

Stablecoins allow individuals to instantly get access to dollars and avoid hyperinflation. Bitcoin is the highest performing asset of all time with an average annual return of 230%. Yields for lending deposits are often 10-20x what a conventional bank would offer for a savings account.

Since the launch of Ethereum, DeFi TVL has hit an ATH of 175B and currently sits at around 100B.

Although the growth rate is quite impressive, it still pales in comparison to the size of TradFi and global GDP. For comparison, the interest rate swap market has a global notional value of 465 trillion which alone is 5000x the size of DeFi.

If DeFi was a country, it would be the size of Guatemala. Not insignificant but considering the large notional of capital markets it is still small.

Interest rate swaps alone are 4x the notional of global GDP for example. There is still room to grow and dominate finance.

DeFi is not without its tradeoffs and many of these risks are currently hindering category expansion.

Over 20B has been lost to smart contract hacks, with 2023 experiencing a decrease to approximately 1.7B. Many of these attacks are due to oracle manipulations or vulnerabilities in code bases.

Concentrated Liquidity DEXs offer APYs up to 1000%, however, these yields come with significant risks (leveraged IL, liquidity going out of range, etc).

Other protocols do offer products that are low risk but they are not truly decentralized.

Similar to the Blockchain Trilemma, which states that networks cannot be fully decentralized, stable and capital efficient, there are tradeoffs in yield products. This is known as "The Yield Trilemma" where a yield product must sacrifice one of the following attributes: decentralization, stability (low risk) or capital efficiency until GammaSwap.

Solving the Yield Trilemma could significantly deepen onchain liquidity and enable DeFi to usurp traditional finance.

**If anyone has solved the Yield Trilemma yet, it is Pendle as they offer low risk and capital efficient yields without an oracle. **

The only caveat for Pendle is that the markets have expirations which makes it less passive then GammaSwap yield tokens. Another honorable mention is GMX: GMX V2 offers strong yields with less principal risk since the funding rates are balanced unlike V1, however it does rely upon an oracle.

GammaSwap's new yield tokens will be fully decentralized, capital efficient and low risk while deepening onchain DEX liquidity - solving the yield trilemma.

What is Capital Efficiency?

Capital efficiency is defined as the ratio of money made over money spent during a certain time period. A yield strategy is more capital efficient if $1 is used to earn $10 annually instead of $5 annually. High yield strategies often come with significant risks, however, due to how leveraged the principal is.

Uniswap and Aerodrome both offer significantly higher APYs than other yield venues (often 50-1000% APY depending on the pair), however, for concentrated liquidity, users are exposing themselves to leveraged Impermanent Loss risk within the range and no yield if the price goes out of range.

Jupiter JLP and GMX V1 offer 20-50% APY on a simple index product but there is the risk that LPs will have to cover traders realized PnL if they are profitable. Since JLP does not balance funding rates, this risk is not insignificant.

What is Stable (Low Risk) Yield?

Stable (low risk) yields are yields you can earn without significant principal risk. For example, you can supply assets on Aave and earn a yield without any additional risk beyond spot exposure. There is a risk of bad debt or a smart contract exploit but Aave has a massive insurance fund to cover this.

Ethereum validators have slashing risk but stETH reduces this risk for depositors in multiple ways:

• Diverse and reputable node operators
• Insurance funds to cover slashing penalties
• Robust risk mitigation frameworks

Curve finance has IL risk similar to most AMMs but since they use an internal oracle & stable swap algorithm with pegged assets this risk is also relatively low.

These protocols currently have the lowest yields on the market, however, and are therefore not capital efficient.

Why is Decentralized yield important?

Decentralized yield means reducing centralization risk either from exchanges or centralized entities making protocol decisions rather than a distributed network.

Although Ethena is onchain, it custodies assets and maintains derivative positions on centralized exchange venues like Binance, Deribit, etc. The protocol is beholden to these exchanges and if these exchanges blow up could have serious consequences for the protocol.

Hyperliquid is an L1 but with a narrow range of validators confirming blocks. This will change as the protocol becomes more decentralized, however, the strategy behind HLP is using an algorithm controlled by the team and at the time of writing is not open source.

Solving the Yield Trilemma

GammaSwap solves the yield trilemma by offering a product similar to Ethena but for AMM Yield. Since DEXs are decentralized and have no oracle requirements, GammaSwap yield tokens are maximally decentralized, can offer capital efficient APYs (60-80% initial projections for ETH) with low risk exposure (replicating spot & max drawdown of 3%).

GammaSwap enables you to perfectly hedge IL for any token in any AMM solving the yield trilemma for users.

Growing DEX Liquidity by reducing risk

Right now DEXs offer the highest APY of the major DeFi categories but have the lowest TVL. This is due to the higher risk of providing liquidity (leveraged IL for concentrated liquidity AMMs) which limits participation by market makers. These risks can be hedged out but involve complex rebalancing strategies available exclusively to institutional capital providers.

GammaSwap yield tokens fix this by democratizing advanced market making strategies to retail investors. The yield token smart contracts will provide liquidity into a concentrated range (let's say +-8% on WETH/USDC) and use GammaSwap positions to hedge the IL. Users will have replicated spot exposure and the tokens will be completely composable (can be looped on a money market, traded on Pendle, etc).

By offering simple risk exposure, the core team believes we can cross the TVL delta between DEX yields and liquid staking meaning it is currently a 40B opportunity (more if DeFi grows). All of the capital provided will serve to build onchain liquidity which can help make DeFi more accessible and support the growth of other protocols.

The APYs are of course subject to change but projections based on backtesting are in the 60-80% range for WETH, which should be attractive compared to other low risk offerings in DeFi.

We are excited for this new product and believe it will help GammaSwap become more accessible to a larger cohort of users. Additionally, it should increase DEX liquidity significantly.

The two yield tokens GammaSwap will be launching initially are focused on EtherFi liquidity - geETH (replicating eETH spot exposure) and geUSDC (replicating stable USDC exposure).

Stay tuned as this new product goes live in the next 4-8 weeks!