AMM Solution for Perp Liquidity: GammaSwap | TKX Weekly

4 min readSep 27, 2023


by @Guaaronnnn
editor @uuwagyuu

Although we are currently experiencing a bear market, a new narrative is emerging — LPDfi. LPDfi stands for Liquid Providing Derivatives Finance, which utilizes AMM LP to create products such as perpetual and options. The main problem that LPDfi aims to solve is liquidity fragmentation across many derivatives protocols in the market.

Today, we are going to take a closer look at an LPDfi project that has gained a lot of traction due to its innovative approach — GammaSwap.


GammaSwap is a pioneering DeFi protocol designed to optimize liquidity in AMMs by offering better risk-adjusted returns for Liquidity Providers (LPs). Recognizing the challenge of impermanent loss that LPs often encounter, GammaSwap innovatively introduces a two-sided market for volatility risk. Through its distinctive Volatility Perpetuals, traders can borrow liquidity, achieve leveraged exposure to various assets, and even have the potential to transform Impermanent Loss into Impermanent Gain, enhancing the overall DeFi trading experience.

Issues & Solutions


  • Impermanent Loss (IL) for LPs: In AMMs, Liquidity Providers often face Impermanent Loss when token values shift in their pools. Even though they earn fees from trades, these often don’t cover the losses from IL. This is because more trading doesn’t always mean bigger price swings.
  • One-way Volatility Trading: Traditional AMMs limit users to only ‘sell’ volatility. This restriction hampers diverse trading strategies and can undervalue volatility, leaving LPs under-compensated for the risks they take.

Solutions Offered by GammaSwap

  • Trading Both Ways: Unlike other AMMs, GammaSwap introduces a two-sided market. This means users can both ‘buy’ and ‘sell’ volatility, opening up new trading strategies and potentially offering fairer pricing for volatility.
  • Making IL Work: GammaSwap’s design allows traders to counteract the positions of Liquidity Providers. This innovative approach can turn the typical downside of Impermanent Loss into a potential advantage. Plus, with GammaSwap, LPs can earn both the usual swap fees and additional borrow fees, aiming to give them better returns for their efforts.


Liquidity Providers (LP Suppliers or Short Gamma)

Liquidity Providers on GammaSwap can either deposit LP tokens from AMMs like Uniswap and SushiSwap or directly supply assets like ETH or USDC. In return, they earn swap fees from the underlying AMM and additional borrow fees when their liquidity is borrowed on GammaSwap. This dual-fee approach aims to give LPs a higher yield than traditional AMMs. Furthermore, GammaSwap adjusts the revenue LPs earn based on market volatility, offering a more adaptive and potentially risk-mitigated environment.

Liquidity Borrowers (Long Gamma)

Borrowers provide collateral, typically the underlying assets of the LP tokens, to borrow on GammaSwap. They’re responsible for the swap fees the LP token would’ve earned in its original AMM and an additional borrow fee set by GammaSwap. The borrowing strategy is a play on market volatility. By borrowing and leveraging their positions, borrowers aim for a net profit, leveraging GammaSwap’s tools to navigate market movements.

Volatility Perpetuals

Key Features

  1. Dynamic Leverage with Exponential Returns: Unlike traditional futures with a linear return curve, Volatility Perpetuals offer dynamic leverage. As the market price moves away from your opening position, your leverage adjusts, leading to potential exponential gains or losses.
  2. No Oracle Dependency: GammaSwap’s Volatility Perpetuals operate without relying on external oracles for price verification, reducing potential points of failure and manipulation.
  3. No Fixed Funding Rate: Traders aren’t bound by a standard funding rate. Instead, they owe continuous interest to liquidity providers based on volatility demand and accrued swap fees.
  4. No Expiry: These instruments are perpetual, meaning they don’t have a set expiration date, allowing traders more flexibility in their strategies.


Engaging with Volatility Perpetuals involves borrowing liquidity from Automated Market Makers (AMMs). This borrowed liquidity is represented by an NFT, which tracks the trader’s position. As prices fluctuate, traders can experience exponential gains or losses. However, they’re protected from traditional liquidation. Instead of a fixed liquidation price, there’s a “time to liquidation” based on the current Loan-to-Value (LTV).


GammaSwap provides a good platform for both LPs (liquidity providers) and traders. LPs can earn better yields to compensate for the risks they take, while traders can enjoy derivatives with no funding rate, time to liquidation, and exponential returns.

One thing worth mentioning is that while other LPDfi protocols are built on pools similar to Uniswap v3, GammaSwap’s protocol is built on pools similar to Uniswap v2. The advantage of this is that it opens up the market for long-tail assets, as v3 pools are not friendly to those assets.

GammaSwap was just launched on Arbitrum mainnet, the overall UX/UI is better compared to other LPDfi protocols.



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Note: TKX CAPITAL do not offer any financial advice.




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