I’m going to start this article by saying that options have been the market sector in DeFi that has given most teams and participants the most headaches out of any sector.
Why?
One, because it is the one that arguably has the highest potential for growth out of any sector, meanwhile teams have struggled to build something that is tailored for a crypto-specific audience that has caught traction. Many have struggled and failed beforehand and even though the TAM is large, if the product isn’t being used it doesn’t matter how much potential there is.
Users have struggled to grasp it as there has been a preference to use less brain power and fire punts on memes instead (who can blame them so far?).
Meanwhile, it is a huge market sector in TradFi that remains relatively unexplored in DeFi.
Simultaneously, we continue to see the market share between CEXs and DEXs converge.
Futures are also in the early innings of this phase as well due to the success of perpetual futures so far.
Thus, the market is screaming out for someone that can create simple UX and abstract the majority of complexity in the options market sector to users and this is what the following protocol that launched after >2 years of building is attempting to do while making LPing on DEXs a better experience for capital providers.
Let’s dive in.
What is Gammaswap?
Gammaswap is an on-chain perpetual options platform that is built on top of Uniswap v2 and offers a oracle-free way for users to take leverage on any token by tapping into the liquidity available in select liquidity pools of every asset.
This topic can get quite complicated so let’s make it as simple as possible to not create any headaches.
Here’s how it works: when you open a position, you’re borrowing liquidity from the pool. The LP tokens get burned, and the underlying tokens become collateral in a smart contract. If the token’s volatility outpaces the borrowing fees, you profit because the collateral’s value grows faster than the debt.
You’ll pay a borrowing fee to the liquidity providers to keep your position open. Unlike perpetual futures, there’s no liquidation price. Instead, the time to liquidation depends on your LTV and the borrowing rate. Higher leverage shortens the time to liquidation, and it fluctuates based on how much of the pool is being used.
LTV = Loan Amount / Market Value of Collateral
Based on what asset you decide to long or short in the liquidity pool, the underlying pool will skew towards the asset you have a long position in or vice versa to make up for the position the user has taken.
Considering this, Gammaswap enables you to get leverage on any token that has a liquidity pool in DeFi by using the Uniswap TWAP oracle instead of having to rely on external parties.
Product pipeline
However, you’re not forced to take a directional view of the market as you can simply long volatility through a long straddle position (basically you buy a “long call option” and a “long put option” on the same asset - 50/50) and you would do this when you expect a big move to happen in either direction.
Gammaswap V2 includes a concentrated liquidity AMM without any ticks or ranges. Still, very little information on this so will wait until that is more clear.
Tokenomics
The native token of the protocol is called GS and has a total supply of 1.6B tokens.
The tokenomics resemble GMX as they use an escrowed version of GS (esGS) to distribute the token rewards. These esGS tokens have to be vested over 30 days before they can be redeemed for GS and sold on the market. To vest, the user must reserve the LP tokens or GS tokens that they used to earn the esGS. As the protocol aims to align token incentives with its capital providers.
Token emissions aren’t live yet but will be when staking is made available relatively soon. Due to the vested dynamics of the emissions there won’t be immediate sell pressure when it launches.
Opportunity
Gammaswap raised $2m in total from investors such as Dialectic and Skycatcher. The investors got in during two rounds at 10M FDV and 20M FDV respectively and have a 12-month cliff with 18-month linear vesting, which is a lot of sell pressure not having to be considered for a very long time.
However, there is an airdrop that will be made available today (the 9th of September) that will amount to $56k worth of sell pressure per week for 8 weeks which is easy to absorb if the protocol can grow and the token gets any demand. This assumes everybody would sell 100% of their allocation which isn’t necessarily the case but for this purpose, it’s better to assume the worst.
The token is currently trading at a 1m market cap with a 15m FDV which is a good value buy in comparison to investors in case it can get any traction.
The risk/reward is decent at these price levels but there is a good chance that the dip from the airdrop being made liquid provides a good buying opportunity.
The LBP bottomed at 0.006 (700k) market cap so that’s essentially where you would expect it at the lowest.
What I like is that the team didn’t care about launching in “bad conditions” and aren’t trying to time the market like many other teams attempt to do. This allows people to get in on the ground floor with the investors and provides less downside than other scenarios.
Either way, you’ll have to decide for yourself whether this is an interesting case or not but you have all the information at your hand to make a calculated decision.
Pros and Cons
Benefits
LPs get higher rewards including borrowing fees making it more lucrative
Autocompounded fees which provide a more efficient LP experience
Built on top of other AMMs and doesn’t fragment liquidity. Liquidity deposited on Gammaswap can be used for both standard trading activity and options which ensures it doesn’t waste idle liquidity that is waiting for a counterparty.
We’ve seen that the pitfall with other options platforms is that the liquidity on their platform was isolated to them only and couldn’t tap into anything else, this is one of Gammaswap’s greater advantages that gives it more potential to be adopted throughout DeFi.
Downsides
The token is currently residing on Arbitrum which has struggled to attract a lot of capital over the past year, even though the platform isn’t exclusive to Arbitrum as it is deployed across multiple chains.
The Arbitrum ecosystem is struggling for on-chain activity and the token would need significant volume to sustain price action.
Complexity which makes it hard to judge whether it will get any traction. If it does, it will most likely require patience and a way to educate users. Protocols that have adopted options have struggled to grow so far, even though they have done their best to abstract away the complexity for the end user.
LPs can’t always withdraw their liquidity immediately in case there is high borrow demand for the pool, it acts as isolated markets.
New protocols introduce new risks. Tough to convince Uniswap V2 LPs to migrate to Gammaswap to enable perpetual options activity on their funds.
Likely to be painful on illiquid pairs.
Security
The protocol has undergone 7 different audits with reputable audit firms such as Zellic and Halborn, while also having an active Immunefi bug bounty program. No critical issues have been found in any of the audits. While it isn’t a guarantee that nothing can go wrong in the future, it is an indication of a team that takes its code seriously and is diligent in its work.
There will probably be a new audit released when V2 is poised to launch as well.
Conclusion
In conclusion, Gammaswap is attempting to simplify and enhance the options market sector in DeFi. By leveraging Uniswap v2’s liquidity pools, Gammaswap allows users to access perpetual options without relying on oracles.
It provides sophisticated uses for liquidity providers that might want to hedge against volatility and market risk.
Time will tell whether it can get traction but it does provide a compelling case based on where it is finding itself at the moment while being a first mover of its kind.
It will be interesting to see if it can overcome these obstacles and emerge as a leader in the DeFi options space and make the LP experience better for capital providers which many have tried before them.
I hope you enjoyed the post. Don’t forget that you are more than welcome to leave feedback or drop any questions in the comment section.
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Disclaimer: All Content on this site is information of a general nature and does not address the circumstances of any particular individual or entity. Nothing on the site constitutes professional and/or financial advice, nor does any information on the site constitute a comprehensive or complete statement of the matters discussed or the law relating thereto. I am just sharing my opinion. This post may contain affiliate links.