Detailed Explanation of Gamma: An Innovative Solution for Managing Concentrated Liquidity in Uniswap V3
Gamma Strategies aims to provide users with non-custodial, automated centralized liquidity management services.Original Title: 《Gamma Strategies: An Innovative Solution to the Challenge of Liquidity Management》
Original Author: Ajay Mittal
Translated by: Biscuit, Chain Catcher
Overview
Automated Market Makers (AMM) are the cornerstone of decentralized finance (DeFi), with the key innovation allowing users to exchange tokens via smart contracts without manual intervention. AMMs rely on liquidity providers to supply tokens to liquidity pools, and in return, liquidity providers earn fees from trades within the pool.
The Uniswap V3 upgrade introduced concentrated liquidity by allowing custom price ranges, enhancing the capital efficiency for liquidity providers. Despite improvements for LPs, providing liquidity remains a complex and time-consuming process. Factors such as price ranges, fee tiers, and the risk of impermanent loss must be considered. Gamma Strategies aims to address this issue by offering a non-custodial, automated concentrated liquidity management service.
Challenges of Managing Concentrated Liquidity
Uniswap V3, Sushi Trident, and other automated market-making platforms have introduced concentrated liquidity pools, allowing users to enhance capital efficiency through custom price ranges. Liquidity providers can choose to set price ranges for tokens, effectively concentrating liquidity. This optimizes the generation of trading fees for LPs but also amplifies impermanent loss. Permanent loss occurs when the price of assets deposited in the liquidity pool moves outside the range initially set by the user. If an LP withdraws their position at a dollar value lower than when they deposited, they incur a loss.
Given the high volatility of cryptocurrencies, investors should monitor their positions to effectively manage yield generation and reduce risk. Liquidity providers must assess the upper and lower limits of their concentrated liquidity positions. This is, of course, very complex and time-consuming.
Liquidity for the WBTC and ETH pair is concentrated near the market price on Uniswap V3. Source: Uniswap V3
Gamma Strategies
Active Liquidity Management (ALM) is a strategy where LPs actively adjust liquidity parameters. As an ALM program, Gamma's smart contracts automatically manage price ranges, rebalance assets, and reinvest earned fees for optimal returns.
How Gamma Works
Gamma is built on a foundational NFT smart vault, allowing users to deposit ERC-20 tokens and NFTs into the vault. Users first mint an NFT vault and deposit tokens into the Hypervisor. The Hypervisor is a smart contract that connects user assets in its vault to Uniswap. When users deposit tokens into the manager, a fungible ERC-20 liquidity provider token is minted, representing partial ownership of the liquidity pool. If users wish to withdraw tokens from the pool, they burn the LP tokens. The structure of the Hypervisor allows multiple parties to concentrate their tokens in a single management center while maintaining custody of their assets.
The first liquidity challenge on AMMs like Uniswap is that users need to form token pairs in an exact 50/50 ratio. The Hypervisor structure allows LPs to deposit a single token or any combination of tokens in varying ratios. This is achieved through foundational innovations and limit structures, where the foundational position matches the ratio of tokens in the pool, while the limit position contains a single asset. Ultimately, the Hypervisor executes functions on behalf of LPs, such as setting position ranges, rebalancing, extracting yields, and reinvesting.
The Supervisor contract then uses the asset management strategy of the Hypervisor, regularly calling the rebalance function to adjust LP positions on the AMM. The rebalance function is a key component, facilitating the process of avoiding impermanent loss for positions. In the future, the most critical metric for backtesting Gamma strategies (optimizing yields) will be impermanent loss.
This is a Gamma strategy for the CRV-WETH token pair. Source: Gamma strategies analytics
Enterprise Solutions
In addition to providing liquidity management solutions for users, Gamma has introduced enterprise solutions for DAOs and other projects. These features include liquidity mining, vault management, and collaborative liquidity management (co-governors).
Gamma believes that if protocols and DAOs can incentivize liquidity on a centralized management platform (like Gamma), it will significantly enhance capital efficiency and reduce the costs of liquidity incentives. This is strategically important for most protocols, as liquidity incentives can lead to a death spiral for native tokens.
Many projects have established grant programs to incentivize contributors, funded by the investment returns of vault assets rather than extracting native tokens or stablecoin balances. Gamma enables projects to optimize the yield of their treasury assets and use this income for grants.
Many projects have begun using protocol-controlled liquidity programs, and Gamma can provide collaborative management solutions for such programs.
Currently, Gamma has locked a total value of only $13 million in assets, suggesting that not many projects are utilizing Gamma's enterprise management platform. Looking ahead, this could be a major driver of Gamma's growth. Many DAOs and protocols have accumulated significant funds. Liquidity management remains an "unsolved" challenge.
Gamma's Positioning
How does Gamma manage the range of liquidity positions? This is the core strategy of Gamma. In publicly available materials, the team has reviewed some high-quality strategies but has not provided details on the strategies adopted in specific pools.
According to Gamma, the strategies are based on backtesting past prices and other time series forecasting methods, such as Bollinger Bands, empirical probabilities, and machine learning algorithms. Gamma draws inspiration from research teams at Harvard University, for example, which introduced a framework for expected price range strategies, providing liquidity within a range near the current price, with the set price range being the interval likely to move within the next 10 minutes, based on historical data.
Gamma has also launched a $500,000 grant program to incentivize users in the community to develop liquidity management strategies. In this way, Gamma can become a platform for experimental price prediction strategies.
Gamma's Token Economics
GAMMA is the native token of Gamma Strategies. The token economics of Gamma is relatively simple. Users who stake GAMMA will receive 10% of the fees from all liquidity pools on Gamma as rewards. The Hypervisor contract automatically collects a 10% fee. Therefore, the Gamma token allows users to benefit from the profits of liquidity pools without providing liquidity. The Gamma team has introduced a staking mechanism for GAMMA through xGAMMA. When the mining pool rebalances and allocates 10% of the share to GAMMA stakers, yields are generated. xGAMMA represents staked GAMMA tokens. Currently, the GAMMA token does not have governance rights or specific liquidity mining rewards. The team has stated that these features may be added in the future.
The total supply of GAMMA tokens is 100,000,000, of which approximately 33% is in circulation, and 66% is not.
Source: Gamma Token Economics
Conclusion
Gamma is a solution addressing fundamental issues in the decentralized finance services industry. Currently, the total value locked is only $13 million, but the fees generated exceed $7 million, which is clearly an underutilized solution within the ecosystem. The team claims that the APR of actively managed liquidity pools is approximately 21%, which is an impressive market-making strategy.
Gamma represents an ecosystem layer for liquidity management in DeFi. The death spiral caused by token liquidity and incentives remains a fundamental issue for DAOs and DeFi protocols. Given the complexity and risk-return profile of liquidity provision, users are not always the best audience for participating in liquidity; B2B is preferable to B2C. For this reason, Gamma's most significant growth opportunity will be to collaborate with a large number of project parties.
While Uniswap is the dominant AMM in DeFi, holding about 80% of the market share in the Ethereum ecosystem, Gamma will continue to expand. The team has an ambitious roadmap that includes expansion to other chains, such as Polygon (already launched), Optimism, and Arbitrum. Additionally, the team has announced partnerships with other projects like Tokemak, Olympus Pro, and KeeperDAO.
In short, keep a close eye on Gamma, as it is a high-quality solution to the liquidity issues in DeFi.
Sources and Further Reading:
ETH Global Presentation (November 2021)
Additional reading on Impermanent loss from Consensys
Challenges with Liquidity Providing and the benefits of Active Liquidity Management by 0xKydo
Strategic Liquidity Provision in Uniswap V3 (Harvard Researchers)
