GMX <> GammaSwap Proposal

Background summary:

GammaSwap is the first volatility DEX enabling people to short liquidity inside any AMM and any pool. This enables traders to long volatility or hedge their impermanent loss (IL) for any token. The long volatility positions can have payouts similar to a long straddle or synthetic call or put.

As an LP, if you provide liquidity inside of GammaSwap you can earn the fees from the underlying AMM plus the fees from those longing gamma. This should lead to better risk adjusted returns for LPs. One can imagine that even without hedging, in periods of higher impermanent loss (volatility) there will be more demand for gamma and the interest rate on loans will increase – meaning LPs are better compensated for the IL risk.

Our long term goal is to build an AMM that isn’t fee incentivized by swaps, but rather from those taking the opposite side of the impermanent loss trade – similar to a normal options market. In Tradfi, you have individuals writing options (selling gamma) and others buying options (buying gamma). Since IV (Implied Volatility) has overstated HV (Historical Volatility) 83% of the days since 1990, the edge has generally been to volatility sellers.

Given the higher volatility in crypto, we believe that the GammaSwap model will enable retail LPs to remain passive while expecting to be positive EV on average, unlike in the current AMM model.

We plan on supporting Uniswap V3 & V2, Sushi, Balancer and eventually our own novel AMM.

Proposal:

  1. Hedged IL Vaults in UniV3

A big problem for Liquidity Providers is Impermanent Loss, especially for volatile tokens. The first part of our proposal is to build vaults on UniV3 for the ETH/GMX 1% and 0.3% fee tiers to enable liquidity providers to automatically hedge their IL exposure. We will do this by building automated strategies that provide liquidity in these pools and also take out loans that are long gamma (turning IL into impermanent gains) with a small percentage of the yield. This should drastically reduce impermanent loss exposure for LPs, thereby attracting more liquidity to the pool, reducing slippage for traders and other negative externalities from low liquidity.

  1. Higher Yield for GMX UniV3 LPs

Comparisons of similar MCAP tokens

-GMX UniV3 top pool TVL = 7.48M , DEX Volume = 7.6M

-CRV curve top pool TVL = 37M, DEX Volume = 2.4M

-Lido sushi top pool TVL = 8.75M, DEX Volume = 4.6M

As you can see, although GMX has one of the highest DEX volumes it has relatively low TVL in AMMs – most likely due to the opportunity cost of staking GMX, however, the negative externality is lower liquidity. In addition to the vaults, GammaSwap will enable significantly higher yield in UniV3 since LPs will also earn the fees from those longing volatility from the pool. Given the HV of GMX, we anticipate that the boosted yield from gamma on WETH/GMX will be significantly higher than other token pairs. Even without hedging, LPs will also be better compensated for the risk they are taking due to the dynamic interest rate employed by GammaSwap, similar to the Aave interest rate model.

  1. Synthetic calls & puts

When combining a long straddle with a perpetual future, you can get return payoff curves that resemble a call or put. We can combine these long straddles from UniV3 with GMX assets on Arbitrum (ETH, BTC, Link, Uni) to create synthetic calls and puts.

Although GMX is releasing their own synthetic product soon, the GMX contributors do not see this as a competitive product. The heterogeneity of the instrument construction will yield radically different liquidity profiles for GammaSwap Synths and GMX synths. Since liquidity precedes utilization, it’s highly unlikely the two platforms will be cannibalizing each other’s user base. Rather, it will allow GMX traders exposure to a wider array of synthetics and drive more fees to esGMX holders. For example, this type of synthetic call and put will be less prone to liquidations as GammaSwap options do not have delta risk.

With these three product offerings, we propose a token swap of $100k in value at a $10M FDV for GammaSwap

Swap Terms:

-The value of esGMX will be taken as the 30-day average price of GMX in the 30 days prior to the approval of the governance proposal, using daily closes on coingecko.

-GammaSwap will lock the esGMX tokens permanently

-The proceeds from staking esGMX will be used to fund grant programs to build vaults or structured products leveraging GMX & GammaSwap, driving more fees to both platforms.

-GMX will receive 1% of the 16M total token supply of GS, which will be a part of the real yield narrative. The GMX DAO can vote on how to use the proceeds from GS in any way they see fit. These tokens will also be locked permanently

The swap is contingent on the successful audit of the GammaSwap platform by Halborn and integration into UniswapV3.

Disclosure: “It should be noted that, to the best of our knowledge, two GMX contributors, quat and coinflipcanada, have participated in the GammaSwap seed round. This information is being provided as a disclosure, and should not be interpreted as an endorsement.”

23 Likes

great Collab, looking forward to it…

3 Likes

Thank you for putting this proposal up for consideration by the DAO, Devin. Interesting products, with interesting prospects. I’ll have to dive in a bit more, to understand all the implications and opportunities.

2 Likes

Of course, awaiting your feedback on the proposal and different products mentioned. Thanks for your support.

awesome stuff, looking forward to it

1 Like

This proposal makes a lot of sense. Having GMX permanently lock their GS tokens is +EV for GS as well.

3 Likes

definitely agree with @portiadog, @meucke. Lot of big opportunities here, makes a ton of sense

2 Likes

GS has a great team behind it. Definitely a proposal I like :+1:

3 Likes

Sounds possible! I like these two teams working together

3 Likes

I’m a huge fan of both protocols! 100% supportive of this proposal. Future collabs are going to be :fire:

2 Likes

Beautiful Proposal, glad to be a part of this community. Lets make this great

1 Like

I think this proposal is extremely reasonable. Unlike other projects which used bloated valuations to offer a token swap, Devin is offering the dao 1% of the supply at a very reasonable 10m Market cap.
Given the very innovative nature of the GS project, this is likely to grow expodentially for the GMX dao with a high ROI.
Furthermore, the GS team is offering to never sell their esGMX…locking it permanently and effectively removing those tokens from the circulating supply. This is an EXTREMELY attractive offer and I urge the GMX community to accept and support this proposal as it is highly advantageous to the project.

5 Likes

I’ll be a voting a BIG YES, win-win for both project, really good for GMX treasury as well TBH

2 Likes

good jog guys … congratulations … 2023 will be huge for this project !!

2 Likes

I stand behind this proposal 100%. GMX must continue to establish deep relationships with the most innovative defi primitives to remain competitive. As a fan of both protocols, this proposal will be one of many to come in the future!

1 Like

GammaSwap brings several key benefits to the GMX protocol, making it an innovative and valuable addition to the ecosystem.

First and foremost, GammaSwap enables LPs to hedge their IL exposure, which is a major problem in the current liquidity provision landscape. By building vaults on UniV3 for the ETH/GMX 1% and 0.3% fee tiers, LPs can automatically hedge their IL exposure and drastically reduce their risk. This property + the fact that LPs will be able to earn higher yield, will attract more 3rd party liquidity to the pool, reducing slippage for traders and other negative externalities from low liquidity. It is not to mention that the same benefits apply to the POL (protocol-owned liquidity) that the GMX team has been building over time. So, only based of the token utility, it already makes sense to create a partnership between both products.

On top of the mechanics outlined before, the numbers that Devin and the GS team propose make a lot of sense. That token swap doesn’t only create good synergies which align the long-term vision of both protocols. It gives GMX 1% of the supply of a protocol that is positioned to disrupt the liquidity provision market + it locks $100k esGMX forever.

Because of the exposed reasons, I think this is a great proposal that should be accepted.

1 Like

That’s great! I was waiting for an AMM with options protocol in it and GammaSwap seems to solve this problem. It would be great to be partner with you!

1 Like

Good stuff frens :sushi: :sailboat:

1 Like

Looks good, excited for this deal to go through!

2 Likes

Awesome guys, keep on buidling!

2 Likes