Chapter 2 - GammaSwap Basics

Lenders (Liquidity Providers)

Users who provide liquidity can earn passive yields with minimal Impermanent Loss risk. Providing liquidity is attractive for those looking to earn additional yields on their crypto assets completely passively. There is no yield without risk, however. There are two core risks liquidity providers should be wary of.

• Impermanent Loss Risk: This is a well known risk for any AMM. It occurs due to the dynamic rebalancing the AMM engages in to maintain a constant product in CFMMs. Luckily, the risk in GammaSwap is minimal and is similar to Uniswap V2 style AMMs. The risk can be calculated easily using the calculator here. It is significantly less risky than CLAMMs like Uniswap V3 and there is also no JIT.

• Liquidity Risk: Similar to lending markets like Aave, if utilization is high, the liquidity for lenders to withdraw is reduced. Therefore, unlike a traditional AMM, you may not be able to remove all of your liquidity at once. GammaSwap has dynamic fees and exponentially increasing borrow rate to prevent over utilization of the pool; however, in periods of high volatility this is a risk. You can wait until utilization is reduced and remove liquidity in multiple transactions.

Borrowers (Perpetual Option Traders)

Borrowers can trade volatility on any asset since GammaSwap is not reliant on an oracle. There are three trade positions available currently: Straddle, Long and Short. A straddle profits if the price moves in either direction. A long or short profits if the price increases or decreases, respectively. The straddle has less leverage and a higher cost to hold the position, however. The returns replicate those of a perpetual option. It is a way to get convex delta exposure and useful for sophisticated investors who want to hedge an LP or option position. For speculators, it provides leverage without price based liquidation risk. The core risk to borrowers is liquidation risk, with other ancillary risks to consider which may affect a trade position.

• Liquidation Risk: Liquidations in GammaSwap are not based on price like perpetual futures but rather the Loan to Value (LTV) ratio of the deposit. The UI calculates a time to liquidation based on the current borrow rate and LTV. This provide traders with protection on their leveraged positions given there are no position wipeouts from large price wicks.

• Rate Risk: The borrow APR that the trader must pay to hold the position open is variable. If utilization of the pool increases, the position may become costlier to hold. To avoid liquidation, a trader can add additional collateral or close out their position entirely.

• Slippage: In a directional position, long or short, the collateral is rebalanced to the volatile token or more stable token respectively. The protocol uses external liquidity sources to rebalance when available to mitigate slippage cost.

Spot Traders

Traders can also swap spot assets using DeltaSwap.

Arbitrageurs are incentivized to interact with DeltaSwap when tokens are mispriced compared to other market venues. GammaSwap relies on spot traders to price the assets in the pool correctly without utilizing an oracle.

There are two main risks to be concerned with as a spot trader.

• Slippage: Since the liquidity in GammaSwap can be borrowed out, it is possible that in periods of high utilization that the liquidity in the CFMM will be low. This will means spot traders will incur higher slippage during periods of high volatility. Make sure to monitor your price impact and set tight slippage settings to avoid excessive slippage.

• Inventory Risk: With any spot purchase, traders have delta exposure to the asset and if the price decreases their portfolio will lose value.