Value to AMM LPs
Last updated
Last updated
By design, AMM Liquidity Provider (LP) captures most trading fees paid by the swappers as the compensation and incentive for them to supply liquidity and act as the counterparty of swaps. Effectively, AMM LPs take revenues away from CEXs. The yield or return from trading fee alone can reach 10%-20% for certain AMM pools, which is more lucrative than other yield sources such as 1%-5% in traditional finance. Hence lots of capital with investment strategies focusing on earning yield is attracted into AMMs. The TVL in AMMs has been more than $3B even during the bear market.
AMM LPs typically park their assets in capital (e.g. stablecoin, WETH, WBTC) and don't hold project tokens. When they want to earn high yields from AMM LP positions, they need to buy half the position in token and pair the other half in capital. This incurs frictions, inefficiency and risks. Impermanent Loss (aka LVR) risk is the pain-in-the-ass that discourage LPs from supplying more capital into AMMs. The market has an unfortunate narrative that AMM LPing is not profitable.
There are two main approaches that AMM LPs have been using to reduce risks and try to make AMM LPing profitable even though both approaches have not proven to be successful.
In the first approach, AMM LPs hedge their risks using other financial products such as options. So far, no public or private strategies have proven to work at scale. In addition, except for a few blue chip tokens, it is super hard to find other financial products to hedge the risk.
In the second approach, after the Concentrated Liquidity feature was introduced in Uniswap v3, some AMM LPs have been using the so-called LP position management tools to reduce impermanent loss. Unfortunately none of these tools have proven to be successful because nobody can predict the movement of the crypto market.
To protect themselves, professional market makers on CEXs typically structure special terms with projects for their market making engagements. Typically pro MMs can borrow tokens from projects for free and have the option to buy the tokens at a certain price, the so-called "free loan + option" model. Double effectively democratizes the CEX market making agreement model for AMMs, and makes the same benefits (free loan + option) exclusive to CEX pro MMs available to all 300k+ AMM LPs.
With its unique design, Double can, by math not by data, significantly reduce impermanent loss for capital providers (Double uses Capital Provider to differentiate from LPs since capital providers only supply the capital side where LPs supply both sides of a pool). (Note: no risk, no rewards. AMM LPing can offer a much higher return than risk-free yield. So don't expect that the impermanent loss risk can't be completely eliminated.)
As shown in the spreadsheet above, when token price goes down, Double can reduce impermanent loss by 60%-90% compared to the method without using Double. More importantly, with Double, the LP positions can still be profitable even when token price drop by 70%-90%. Big price drops is one of the main concerns that AMM LPs have.
In addition to the two big benefits: doubling ROI and significant risk reduction, capital providers can also farm Double's incentives - Double Dip Joy (DDJ). DDJ has no pre-mine and more importantly, has strong utility inside Double and hence strong market demand. Combining with the additional yields from Double's incentives, Double can offer "positive risk-adjust yields" to capital providers for most AMM pools.
