What is Swaap Finance?
In the new era of DeFi, AMMs have emerged as a powerful force, driving innovation and unlocking new opportunities for users across the globe. Hundreds of AMMs compete with each other in order to make capital as efficient as possible.
Swaap Finance entered the DeFi scene in 2021 with a daring selling proposition: "no impermanent loss, just yields."
The protocol achieves sustainable yields by eliminating arbitrage opportunities. As a result, the system is static, which means no high capital risks. Swaap Finance uses a couple methods to achieve this balance.
First, it totally decouples the market-making from the price discovery by leveraging on-chain data from oracles such as Chainlink, removing the risk of impermanent loss. This means the prices on Swaap Finance are sourced directly from Chainlink as opposed to the financial operations on its platform.
The second method involves supporting multi-pool assets by design, thus allowing for a diversified and passive form of investing. This mechanism led to the creation of yield ETFs (index products that collect fees).
To this day Swaap Finance has never been hacked. Because Swaap Finance doesn't have a native token or a DAO governance structure (yet), the only attack vector remains the code.
With a TVL of just $1M, Swaap Finance is currently preparing for the launch of V2. The new version of Swaap comes with more advanced market-making models, enhanced platform performance, greater token variety, and choice between high-yield and low-risk strategies.
How does Swaap Finance work?
Swaap Finance is the first market-neutral AMM built on Polygon. Market-neutral is a trading strategy that seeks to hedge against the ups and down of the market by taking offsetting long and short positions. In DeFi terms, market-neutral describes a strategy that provides sustainable yields for liquidity providers over time.
Swaap Finance achieves this balance using a proprietary concept called Matrix Market Maker (MMM). Creating an AMM that reduces impermanent loss by staying market neutral has been regarded as the Holy Grail of DeFi. The MMM model brings Swaap Finance closer to a decentralized bank rather than a risky casino trade.
To achieve its neutrality, Swaap Finance relies on price oracles and dynamic & asymmetric spread. Hang on, we will explain how each of these components work.
Price oracles are helping update the prices of DEXs across the entire ecosystem. Swaap Finance relies on Chainlink to aggregate the correct prices from centralized exchanges and other trading platforms. The difference is in how Swaap makes use of the oracles. For example, the price feed is updated every 27s, which enables Swaap to greatly reduce the arbitrage possible on the platform.
Arbitrage done on the platform may be profitable for speculators, but it creates imbalances in the liquidity pools, ultimately hurting LPs and traders. As a result, traders and LPs have an incentive to use Swaap Finance for its stability rather than its arbitrage windows.
The dynamic & asymmetric spread ensures that people can trade while keeping the pool close to its initial ratio of assets aka market neutral.
Swaap inspires from the algorithms active market makers have been using for years in TradFi. Basically, the idea is that the higher the risk of a trade for the pool, the higher the fees and vice versa. Being able to implement a dynamic fee helps users adjust their strategy and rewards LPs based on the state of the markets.
Dynamic spread depends on volatility and inventory. When it comes to volatility, Swaap computes based on the last 10 price feeds, and the expected volatility for the asset in the next few minutes. Low expected volatility means low fees and high expected volatility means high fees. This protects the pool from selling an asset that increases strongly in price in a short time frame. It also protects the pool against frontrunning of the oracles.
Inventory refers to the amount of crypto assets in each liquidity pool. Whenever there is an imbalance within the pool, trades that help rebalance the pool get lower fees. This ensures that the pool’s assets distribution always stay close to what it was at the start.
Trading fees vary depending on assets and market conditions. This provides incentives for traders to keep the pool balanced. For instance, if the pool is slightly imbalanced with too much BTC and too little DAI, a trader might pay 2bps to buy BTC and 30 bps to buy DAI.
How to make money on Swaap Finance?
On Swaap Finance there's one main method to make money, and it's by providing liquidity. Imagine depositing your crypto into one of Swaap's pools and never having to worry about impermanent loss or the protocol fees. All you have to do is to bridge your crypto to Polygon and you are ready to grow your crypto portfolio.
To provide liquidity on Swaap Finance, follow these steps:
1. Open the Swaap Finance app
2. Click on the "Earn" tab at the top of the app
3. Select the pool you would like to provide liquidity
4. Input the number of tokens you would like to add (needs to be a 50/50 ratio)
5. Click "Deposit"
6. Approve the transaction
7. Profit!
The profitability of being an LP varies depending on the deposited liquidity and the pool size. Swaap Finance calculates the APY in real time, which is why the APY estimated should be taken with a grain of salt. For example, if the pool liquidity increases, that means more LPs competing for transaction fees. On the other hand, Swaap's stability will encourage more users to swap through their platform, resulting in more transaction fees. Either way, you are free to unlock your liquidity at any time and migrate to more fertile lands.
It is important to note that Swaap is still being improved upon. That being said, they are expected to support more liquidity pools and tokens with the launch of Swaap v2.