Liquidity Hacking is the process of using liquidity management tools to creatively overcome the limitations of financial systems
Introduction
Much like Computer Hacking, and more recently Biohacking; Liquidity Hackers use open-source tools to achieve novel and clever outcomes, and abide by a common set of hacker ethic that prioritises openness, sharing, and transparency.
The following is a summary of each type of hacking and how they contributed to a new age of citizen-led innovation:
The table above shows that:
- Computer hackers disrupted the software industry by building open source systems such as Linux, Bitcoin, and Ethereum.
- Biohackers are disrupting the medical industry using rapid-response COVID Testing, and open-source Gene Editing.
- Liquidity hackers will disrupt finance, by using decentralised protocols to generate sustainable yields and liquidity improvements.
Why is liquidity hacking important?
A computer needs code, a human body needs DNA, and finance needs liquidity. Liquidity Hacking allows anyone to experiment with liquidity, and therefore tweak the fundamental building blocks of finance.
Charm’s Alpha Vaults is the first open-source tool for liquidity hacking. Its launch opened the door to liquidity hackers to create citizen-led financial innovations, similar to how computer hackers created open-source software innovations.
The following provides a summary of the innovations created by liquidity hackers using Alpha Vaults:
Earn sustainable yields without incentives
These are examples of vaults earning short term yields using narrow range strategies, or long term yields using wide range strategies, without earning any token incentives. These vaults shows it’s possible to use liquidity provision to earn sustainable, and often, high yields.
Some examples are:
WMATIC / GMT vault — 672.2% APY (18.6% returns over 11 days)
FUMO / WETH vault — 373.9% APY (37.4% returns over 165 days)
USDC / WLD vault — 66.2% APY (24.7% returns over 142 days)
LDO / WETH vault — 23.3% APY (10.8% returns over 171 days)
GMX / USDC vault — 14.9% APY (6.9% returns over 171 days)
Earning high yields with incentives
These are vaults that are optimised to earn token incentives. Incentives can be earned from any incentivised pool, because a vault can be created for any pool. Some examples are:
wstETH / USDC — 266.82% APY via Merkl
frxETH / svETH — 116.05% APY via Merkl
FRAX / svUSD — 212.56% APY via Merkl
USDC / osETH — 35.53% APY via Merkl
Automating buying the dip
These are vaults that starts with only one asset, and exit when it is converted into the other asset. This approach is better than swapping or buying the assets directly because depositors earn additional yields. For example:
The WETH / SPX vault started with a deposit of 100% WETH to buy SPX whenever the price decreases, until all WETH is converted to SPX. The vault is currently at 84% SPX, and has earned 96.2% APY in WETH, which means it received around 10% more SPX compared to swapping or buying SPX directly.
Other examples include LORDS/WETH, WETH/SNX, and wstETH/USDC.
Fully automated liquidity management
These are the vaults that use an automation solution to call rebalance(), so that the vault earns yields without human intervention. For example:
The GMX/USDC vault uses Gelato automate to call rebalance() every 60 hours for 171 days. It has earned 14.9% APY, and its liquidity is 8.43x better than Uniswap V2.
Other examples include WETH/ARB, LDO/WETH, and WETH/DAI.
Improve liquidity using less funds
These vaults are optimised to increase the liquidity of the underlying pool. Most vaults were able to achieve at least 3x better liquidity than Uniswap V2, at no increased risk of financial loss. For example:
The WETH / FLOOR vault currently has 8.7x better liquidity than Uniswap V2, and an APY of 31.5%. The vault’s TVL is around $450k, which means it has the same liquidity as depositing $4mm into Uniswap V2, AND has generated 31.6% APY better returns.
Others examples include WAMPL/WETH, USDC/osETH, and USDC/WETH.
Conclusion
The Liquidity Hacking innovations illustrated above were introduced by Alpha Vaults’s users, and are openly shared for anyone to copy and improve upon.
Liquidity hackers are therefore a new addition to the hacker community, and their role will only get bigger as they generate more sustainable yields from trading fees, create more liquid markets for tokenized assets, and migrating more liquidity from Uniswap V2 to V3.
If you are interested in the above, you can:
- Go to alpha.charm.fi to start hacking liquidity…
- Go to Charm’s docs to learn about liquidity management…
- Go to Charm’s discord to discuss, share, and collaborate…
We look forward to seeing you there!
