Gammaswap: The ability to hedge shitcoins

AMM liquidity providers are just hapless pawns getting ripped into pieces because they are not traders. Like how are they supposed to compete with real competent traders, LPs are just trying to make a quick buck when bam, they are on the wrong side of the trade and get shafted with significant impermanent loss that can't be offset with falling yields and inflated token prices. Liquidity Providers (LPs) on DEXes lose money consistently with respect to toxic order flow, and thus it is suggested that it is not worth providing liquidity on DEXes. Providing liquidity is the same as being short gamma because you expect prices to be stagnant and collect the yield on providing liquidity. Before we get started, we need to ask ourselves some questions.

What is Impermanent Loss?

Impermanent loss happens when you provide cryptocurrency to a pool and your assets' value changes. This can be understood better with an example.

Imagine you want to add cryptocurrency to a pool that has both ETH and USDT. You must add ETH and USDT in equal amounts, so you deposit 1 ETH and 100 USDT. Let's say that at this time, 1 ETH is worth $100. This means the total value of your 1 ETH and 100 USDT is $200.

The overall pool has a total of 10 ETH and 1000 USDT. This means you have a 10% share of the pool and will earn 10% of the trading fees from the pool.

Decentralized exchanges like Uniswap use a formula to keep the value of the pool constant:

x * y = k

In this formula, X and Y represent the amounts of two different cryptocurrencies in the pool, and K is the constant value. For example, in the pool you are in, 10 ETH * 1000 USDT = 10,000. This value must remain constant before and after any trades in the pool.

Let's say the value of ETH increases to $400, but the value of ETH in the pool is still based on the old price. This creates an opportunity for arbitrage traders, who buy and sell assets in different markets, to profit from price differences. In this case, the arbitrage traders would buy ETH at a lower price from the pool until the price matches the value in other markets. As a result, the pool would end up with 5 ETH and 2000 USDT, but the constant value would still be the same: 5 ETH * 2000 USDT = 10,000.

If you decide to withdraw your funds from the pool, you will get back 10%, which would be 0.5 ETH and 200 USDT, for a total of $400. If we also include the $20 in trading fees you earned, your total would be $420. However, if you had not added your ETH and USDT to the pool, you would have had 1 ETH worth $400 and 100 USDT worth $100, for a total of $500. This difference between the two scenarios is known as impermanent loss or the opportunity cost of lending your cryptocurrency.

What is Gamma?

Gamma measures the rate of change in an option's delta per unit of change in the underlying asset's price. In other words, it's a fancy way of saying how much an option's value will go up or down based on a tiny change in the thing it's tied to.

Introduce GammaSwap; GammaSwap is an excellent new protocol that lets you do all sorts of fancy option-like stuff on decentralized exchanges like Uniswap, Sushiswap, and Balancer. For example, with GammaSwap, you can go long on gamma and create payoffs similar to call-and-put options. And the best part? There's the potential for a fee-free DEX! No more pesky trading fees to eat into your profits.

The current problem in the AMM market

If you're an avid DeFi user, you might have noticed that you can't buy volatility/ long gamma at the moment. That's because you can only deposit ETH-based funds and use what you've already put in. There's no way to borrow liquidity from the pool. GammaSwap is all about giving traders a chance to buy volatility on Uniswap.

GammaSwaps' Solution

If you provide liquidity to a constant function market maker (CFMM), you'll take on a short gamma position. To get a long gamma position, you can borrow liquidity from the CFMM and hold onto the reserve tokens it represents. This will turn any potential loss (impermanent loss) into a gain (impermanent gain). Of course, the borrower will also have to pay any trading fees that come with borrowing the liquidity.

GammaSwap is a protocol that lets you borrow liquidity from popular constant function market makers like Uniswap, Pancakeswap, and Sushiswap to get a long gamma exposure. It works by taking out reserve tokens from these CFMMs and holding them in a smart contract as collateral. GammaSwap keeps track of how much the reserve tokens are worth and how much the borrower owes. Borrowers will have to pay interest on their loans plus any trading fees that come with borrowing the liquidity. To make sure there's enough money to pay back the loans, borrowers will have to have more collateral than the amount of liquidity they borrow

No oracles, No problem

Lending platforms need oracles to ensure that assets are safe. But there aren't always good oracles for every asset, which can reduce the number of assets available for lending.

These platforms have to use oracles because relying on CFMMs for pricing data leaves them vulnerable to flash loan attacks, where the price of collateral can be quickly lowered to force liquidations on an otherwise healthy loan.

Fortunately, GammaSwap doesn't have this problem because its payoff curve means that the value of collateral can never be dropped to zero through price manipulation with flash loans. Instead, the value of the collateral can only be decreased to the minimum required by all volatility buyers to keep their positions open, plus some extra collateral to cover the trading fee yield and interest.

GammaSwap can offer long gamma exposure to all cryptocurrencies, not just a few, without needing a third party to verify prices. This is different from Aave and Compound.

This means that even new, untested projects can offer long volatility exposure to increase the returns for people who provide liquidity in their tokens and reduce the risk for people who participate in these projects.

No Fee Exchange

The money earned by people who provide liquidity on GammaSwap consists of trading fees and interest. GammaSwap determines the interest rate.

If the returns on GammaSwap are much lower than other CFMMs, there would be an opportunity for arbitrage, which is when people buy and sell assets in different markets to profit from price differences.

This means that CFMMs that use GammaSwap's model doesn't need to charge trading fees to their users. Instead, the traders on GammaSwap make money by offsetting the positions of gamma buyers, who buy the risk that liquidity providers are selling. Gamma sellers earn money from gamma buyers and use spot buyers and sellers (who trade for free) to offset their positions against gamma buyers. Spot traders are motivated to do this because they can make money from arbitrage opportunities on other exchanges and don't have to pay fees to trade on GammaSwap.

GammaSwap Protocol: A Game-Changer in Crypto Trading

GammaSwap is creating something we have never seen or heard of before. This project has a lot of potential because the ability to long gamma gives users the option to trade volatility on any token par but hedge again impermanent loss, rug pulls, and shitcoins. Imagine generating the 2 million percent yield on a shitcoin with being delta neutral.