Gamma Strategies

What is Gamma Strategies?

Automated market makers (AMMs) serve as the foundation of decentralized finance (DeFi), allowing token swaps through smart contracts without human intervention—an essential DeFi innovation. These AMMs rely on liquidity providers (LPs) to furnish token pools. In return, these providers earn fees from transactions within the pool.

Uniswap's v3 upgrade introduced concentrated liquidity, customizing price ranges to enhance capital efficiency for LPs. Despite these improvements, providing liquidity remains a complex and time-consuming endeavor. LPs must grapple with factors like price ranges, fee tiers, and the risk of impermanent loss. Gamma Strategies addresses this challenge by offering non-custodial, automated, and concentrated liquidity management services.

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Recent Video Interview

Main points of the interview:

• Gamma Strategies started mid-2021 in response to Uniswap's V3 design.
• The main advantage of V3 is concentrated liquidity, increasing capital efficiency.
• Focus on mitigating impermanent loss and optimizing liquidity positions.
• Upcoming developments include new hedging vaults to further reduce the cost of incentivizing liquidity.

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How Gamma Strategies Work

Gamma is constructed using modular components, with a central element called a hypervisor, which is essentially a Uniswap position manager contract. This hypervisor contains a range of functions that can be executed by an active manager or Supervisor contract. These functions encompass tasks like rebalancing position ranges, depositing liquidity, collecting and reinvesting fees, and redeeming LP tokens for the underlying assets.

When a user deposits their tokens into a hypervisor, they receive a fungible ERC-20 liquidity provider token, representing their fractional ownership of the pool. If they wish to withdraw their tokens, the LP token is burned. The hypervisor's design accommodates multiple parties pooling their tokens into a single actively managed position.

One challenge in providing liquidity directly on certain AMMs, such as Uniswap, is the requirement for an exact 50/50 pair of two tokens. The hypervisor structure overcomes this by allowing LPs to deposit dual-sided token combinations that don't adhere to the precise 50/50 proportions. This is achieved through an innovative base and limit position structure. The base position matches the token pool's ratio, while the limit position involves a single asset. Ultimately, the hypervisor executes various functions on behalf of LPs, including setting position ranges, rebalancing, and handling fee collection and reinvestment.

The Supervisor contract comes into play by employing an asset management strategy for the hypervisor. Periodically, the supervisor triggers the rebalance function to adjust the LP position within the AMM. This rebalance function is crucial, as it is where the impermanent loss of the position becomes apparent. In the future, it will be essential to backtest Gamma strategies (including generated fees) from an impermanent loss perspective to evaluate their performance.

Dynamic Range in Gamma Strategies

Dynamic ranges serve as the prevailing strategy for Gamma vaults. These ranges come with built-in automation, allowing them to rebalance when specific criteria are met. They are designed to accommodate various risk preferences:

Wide Ranges: These are tailored for long-term liquidity providers, particularly in scenarios marked by high volatility. One of their advantages is that they tend to experience lower impermanent losses. However, they come with higher fees. Over time, the cost savings from reduced impermanent losses often offset the comparatively higher fees associated with these ranges.

Narrow Ranges: Conversely, narrow ranges are ideal for short-term liquidity providers, and they shine in environments with low volatility. These ranges yield higher fees and rewards, often outperforming wider ranges in low-volatility conditions due to their higher fee multipliers. However, they also present greater vulnerability to impermanent losses in high-volatility scenarios. In the long run, the benefits of the higher fees in narrow ranges may not fully compensate for the incurred impermanent losses in such conditions.

In essence, the choice between wide and narrow ranges hinges on risk tolerance and investment horizon, each offering a different trade-off between fees, rewards, and impermanent loss.

Gamma Strategies Project Development

Towards Q4 of 2023, a new GAMMA staking contract will be unveiled, featuring locked staking, voting, and an exclusive bonus reward pool for stakers. Notably, this staking method introduces a significant change in reward distribution, as rewards will now be issued in ETH rather than GAMMA.

This staking system introduces "Vote-Locked GAMMA" (vlGAMMA), where users can stake GAMMA to obtain vlGAMMA. Depending on the duration of the lock period, stakers will receive various multipliers for ETH revenue distributions and voting power:

• 1-month lock = 1x multiplier
• 1-year lock = 2x multiplier
• 2-year lock = 3x multiplier
• 4-year lock = 5x multiplier

Fee distributions will be structured based on 1-month-long epochs, representing the minimum lock period. All fee revenues generated across different blockchains will be converted into ETH and transferred to Ethereum for distribution to vlGAMMA holders. Stakers who hold vlGAMMA tokens can expect to receive a regular distribution of ETH, representing at least 5% of the total protocol revenues.