A review of one community’s efforts to create the next trillion dollar industry
Summary
- Over the past year, Charm has pioneered new ways to create liquidity within DeFi, and its efforts led to the creation of a new industry for Decentralized Liquidity Management (DLM).
- DLM is the practice of using market making strategies to create liquid markets for DeFi tokens, and to help Liquidity Providers (LPs) unlock new sources of income.
- Charm’s Alpha Vaults is the first decentralized liquidity manager. It is also the easiest way to provide liquidity on Uniswap V3.
- Alpha Vaults have been live on Mainnet for over 8 months. They remain the best performing, least volatile, longest running, and most robust LP vault of its kind.
- Alpha Vaults are now sufficiently robust to be used as a key building block within DeFi.
Market makers are important because they create active markets where assets can be bought and sold at the fairest price. They are typically large financial institutions, which use market making strategies to provide up to 60% of the liquidity within finance.
Most of the liquidity within finance is therefore controlled by centralized entities with high barriers to entry, both for new projects wanting to increase the liquidity of their products, and for investors wanting to maximise their yield.
By democratising liquidity provision, DLM offer an alternative to centralized market making. They break down barriers to entry by open sourcing market making so everyone can experience the benefits.
Using DLM, DeFi protools will have new ways to increase the liquidity of their products or tokens, and investors will have more ways to get higher returns.
As DeFi grows, more liquidity will migrate from centralized finance, setting the stage for DLM to become the next trillion dollar industry.
Charm’s Alpha Vaults is the first Decentralized Liquidity Manager. They use a category of DLM called Range Order Strategies, and in particular, Passive Rebalancing, to help LPs get the highest returns. Alpha Vaults is the result of one year of research, refinement, and iteration, over no less than three Mainnet products, and hundreds of research papers and simulations. These efforts are summarised below:
Charm’s first attempt at Decentralized Liquidity Management is its options protocol. It debuted on Mainnet on 18th January, with a smart contract capable of minting the buy and sell side of the market to create liquidity for both sides. Even though the protocol achieved deep liquidity and capital efficient markets for options traders, the losses to LPs who seeded the markets cannot be quantified, and so a quest began to find another type of market maker that can better quantify the risks for LPs.
Charm’s second attempt at Decentralized Liquidity Management is its leveraged token protocol. It uses parimutuel pools, which means the spot traders themselves are also the LPs and market makers. It debuted on Mainnet on 1st April, and offered a more efficient way to make markets because this will happen whenever a trade is placed. Unfortunately, this also introduced uncertainties in traders’ profits and losses, and so a quest began to find another type of market maker that can better quantify profits and losses.
Charm’s third attempt at Decentralized Liquidity Management is Alpha Vaults, this time using Uniswap V3’s ability to provide concentrated liquidity. By making use of this feature, Charm finally found a type of Decentralized Market Making Strategy called Passive Rebalancing, that overcame the shortcomings above and introduced a number of additional benefits. These benefits are summarised in the next section.
Charm’s Alpha Vaults are the first to use Decentralized Liquidity Management (and specifically, Passive Rebalancing), as well as the first Liqudity vaults to launch on Mainnet (on 7th May). It was battle tested over 8 months of continuous operation, and to date, it still remains:
- The easiest way to provide liquidity on Uniswap V3.
- The best performing, and least volatile LP vault for Uniswap V3.
- The most transparent product of its kind.
Further details on Alpha Vaults’ achievements are provided below, highlighting the benefits for LPs, the underlying protocol (ie Uniswap V3), and projects wishing to build on top of Alpha Vaults.
Throughout 8 months of continuous operation on Mainnet, Alpha Vaults have:
Remained robust without downtime, performance issues, or security incidences
- Alpha Vaults are the only major Uniswap v3 vault provider without any security incidences, despite being the first and one of the most widely recognised vaults of its kind.
- The market prices of the underlying consistently stayed within the middle of the ranges chosen by the vault despite high volatilities. This meant LPs were able to collect Uniswap fees AND minimise capital losses.
Generated sustainable long term returns, with low volatility
- On-chain data shows Alpha Vaults is still the best performing LP vault since launching on Mainnet, with the lowest volatility.
- It has outperformed full range LP, and has recently outperformed HODL.
Offered vault strategies that are 100% transparent, and verifiable on-chain
- Alpha Vaults’ source code and strategies are available on-chain, which means anyone can verify the vaults’ performance metrics, strategy, and infrastructure.
Opened up a large number of use cases for Alpha Vault shares
- The properties above mean Alpha Vaults is one of the most decentralized vault products within DeFi, with Alpha Vaults shares being the most transparent, best performing, and least volatile asset class of its kind.
- The shares (which are ERC20) can therefore be used by anyone to build their own decentralized products, and this opens up a large number of use cases for Alpha Vault shares.
Allowed LP risks to be quantified
- By building on Uniswap V3, it is possible to mathematically quantity LP risks, as shown by Guillame et al, Pteris et al, and Kyoronut et al (for example).
- As a result, even better market making strategies can be built in the future.
Contributed to DeFi’s growth by facilitating deep liquidity and cheaper trades
- By building on Uniswap V3 and consistently concentrating liquidity around the market price, Alpha Vault can amplify the benefits of concentrated liquidity to provide deeper liquidity and cheaper trades.
- Alpha Vaults can therefore create real value by increasing the liquidity of all types of asset assets marketed on Uniswap V3.
The above means that after one year of innovating, iterating, and improving, Charm finally found a product category (ie Range Order strategies) that can open up a new trillion dollar industry (ie Decentralized Liquidity Management).
Market making is one of the biggest, and most important industries in centralized finance, and Charm is looking forward to bringing market making to decentralized finance; in order to help DeFi protocols grow, and to help LPs access new sources of value.
If you’re a DeFi protocol interested in using market making strategies to increase liquidity, you can contact Charm at contact@charm.fi, on Telegram or Twitter.
If you’re a DeFi user interested in using liquidity provision to maximise your returns, check out Alpha Vaults.
or If you’re anyone else interested in what you’ve read so far, and want to find out more, then head over to the Charm community using the links below:
Twitter | Discord | Telegram | Email
See you soon : )
