Why LP in GammaSwap?

Benefits of LPing in the GammaSwap Protocol

1. Earn a higher yield

In GammaSwap, you can deposit into various AMMs through GammaSwap: Uniswap V2, DeltaSwap, SushiSwap V2, etc. When you deposit liquidity into the AMM, the liquidity is available for spot traders to facilitate swaps unless the liquidity is borrowed. Borrowers (perp option traders) pay the swap fees the LP position would have earned plus additional funding fees. If you are an LP in Uniswap V2, you have the following return profile.

uniswap lp pnl = swap fees - impermanent loss

If you are an LP in a UniV2 pool through GammaSwap, you have the same return profile (swap fees - IL) except you also earn additional borrow fees.

gammaswap lp pnl = swap fees - impermanent loss + borrow fees

There is no additional Impermanent Loss risk by providing liquidity through GammaSwap. The only extra risk is liquidity risk: if utilization is high you may not be able to remove your whole LP position immediately. This is the same risk as lending markets like Aave. The solution is to remove your liquidity in parts if utilization is high.

2. Earn fees that scale with volatility

The APY for liquidity provides scales with Impermanent Loss risk which means LPs should earn better risk adjusted returns than a traditional AMM. For example, if an LP is providing liquidity into an ETH/USDC pool, and the price of ETH skyrockets from 2,000 USD to 2,500 USDC, the LP would experience a 0.62% loss in his portfolio. The volume may increase in this period but historically it does not increase proportionally with the change in price. It is a well researched idea that many liquidity providers are not profitable due to Impermanent Loss risk. In GammaSwap, when the market estimates that volatility will be high, utilization should increase and LPs will earn a higher APY to compensate them for their risk. This method will self adjust LP fee revenue based on the volatility of various assets and market conditions.

This does not mean you will always be profitable as an LP in GammaSwap, rather that your risk adjusted return should be higher since you are paid by traders willing to take the opposite risk.

3. Autocompounding Yield

Similar to Uniswap V2, all fees autocompound back into your position to earn more yield. This can greatly increase your yield as compared to AMMs like Uniswap V3. Compounding is a powerful feature and can lead to exponential portfolio growth. Here is more information on the power of compounding interest.