GammaSwap: Trading Volatility through LP token | TKX Weekly

4 min readFeb 25, 2023


by @Guaaronnnn
editor @FriedWagyuu

GammaSwap is a new DeFi protocol that offers commission-free token trading and volatility trading without the need for an oracle. It creates a marketplace for gamma (volatility) and provides tools like vaults to address the issue of impairment loss faced by liquidity providers. In this article, we will explore GammaSwap’s mechanisms, advantages, and potential for the future. Join us as we take a closer look at how GammaSwap can benefit traders and liquidity providers in the DeFi space.


GammaSwap is a DEX and AMM built on the Arbitrum network that enables commission-free token trading and volatility trading without the need for an oracle. It aims to address the issue of impaired liquidity that liquidity providers face, increasing their potential profitability, by creating a marketplace for gamma (volatility). LPs in GammaSwap will earn a yield that is greater than or equal to the underlying AMM, such as Uniswap or SushiSwap. However, additional yield depends on the demand for volatility. GammaSwap recently closed a $1.7 million seed round led by Skycatcher, with participation from Dialectic, Space Whale Capital, Modular Capital, and others.

Before diving deep into the mechanism of GammaSwap, let’s discuss how impairment loss relates to volatility. When LPs provide liquidity on Uniswap, they are effectively shorting volatility. This means that if the price of the trading pair remains stable, the LP can earn a trading fee. However, if the price becomes volatile, the LP may experience impairment loss. It’s similar to selling a straddle, where one sells a call and put option with the same strike price, betting on low volatility and earning a premium. Therefore, impairment loss is related to volatility in LPs’ positions.

How it Works

In GammaSwap, there are two roles: liquidity providers (LPs) and borrowers.

LPs short gamma and provide liquidity to the underlying asset. They can deposit liquidity in GammaSwap pools or deposit LP tokens from other AMMs. To compensate for any impairment loss, LPs receive a trading fee and interest from borrowers.

Borrowers, on the other hand, take a long gamma position and deposit collateral in the form of underlying assets. They receive an ERC721 token, similar to UniV3, which represents their loan and manages its terms. The token tracks the fees earned and interest rate. To avoid liquidations, the loan must maintain a 90% loan-to-value (LTV) ratio.

WETH/USDC Pool as example

GammaSwap’s design open the potential that traders can trade on volatility of any token pair. Furthermore, borrowers can also compose different options by adjusting the ratio of deposited assets as collateral. For example, by depositing 100% ETH and 0% USDC, it is equivalent to a call option. On the other hand, liquidity providers earn extra yield (interest) from borrowers which increase profitability.


Vaults are automated tools that help address the issue of impairment loss (IL). These tools will automatically adjust liquidity positions based on preset parameters and can be used with any type of AMM and concentrated liquidity solutions. In addition, GammaSwap’s vaults will partner with other protocols to build out structured products. These vaults enable the creation of more sophisticated products and trading strategies, which can help traders better manage their risk and increase their profitability. By providing automation, GammaSwap is reducing the barriers to entry for DeFi trading and making it more accessible to a wider range of investors.

Final thoughts

GammaSwap is a powerful DeFi protocol that provides a solution to the issue of impaired liquidity for liquidity providers, while also offering a marketplace to trade volatility and hedge against impairment loss. By utilizing the inherent characteristics of being an LP to create a gamma marketplace, GammaSwap provides several advantages, including increased profitability for LPs, greater capital efficiency, and the opportunity to earn additional yield from LP token of other AMMs. Overall, GammaSwap is an innovative platform that has the potential to transform the DeFi landscape by unlocking new possibilities for traders and LPs alike.


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