The popular blockchain’s liquidity providers may benefit from the decentralised trading tool GammaSwap’s introduction on the Arbitrum network today, according to the move’s developers.
GammaSwap enables users of decentralised finance (DeFi) to “short” liquidity provider (LP) tokens by borrowing them from automated market makers (AMMs) and hedging against provided collateral or developing low-risk trading methods. Shorting is a tactic for making money off of an asset’s declining price.
A user who locks funds in a DeFi application in order to receive yield from the platform is known as a liquidity provider. AMMs are trading platforms built on the blockchain that do away with the necessity for centralised exchanges.
Impermanent loss (IL) is a significant risk that AMM LPs assume. When an AMM pool rebalances, LPs suffer an equity loss known as IL. The LP position loses value as the token prices in the pool deviate from their initial ratio. The more value the LP loses and the more likely it is that they will experience negative returns, the higher the volatility, or the greater the ratio between the values of the tokens.
The existing AMM model’s inverse relationship between market volatility and LP profits means that AMM LPs are essentially “shorting” volatility, making money when volatility is low and losing money when volatility is high.
GammaSwap traders have the ability to “go long” volatility by essentially “shorting” LP tokens, giving them the chance to hold the opposite position from an AMM LP and turn an impermanent loss into an impermanent gain.
Due to the hedge against declining token values provided by these features, more users may decide to sign up as LPs, which should improve liquidity across Arbitrum.
According to a GammaSwap official, the team intends to deploy on additional blockchains like BNB Chain and Ethereum and to support Uniswap LPs, which lock billions of dollars’ worth of tokens over countless trading pairs.