Double2win episode — Innovation #6: A Novel Design to Make AMM LPing Profitable
Even though AMMs have found product-market-fit (PMF) and become a formidable alternative to CEXs, providing liquidity on AMM (e.g. AMM LPing) is still risky. To make things worse, the narrative is that AMM LPing is NOT profitable. Double has a novel design that can, by math not by data, make most AMM pools offer the “positive risk-adjusted yield” to capital providers in Double, a critical factor to make AMM LPing profitable and to attract massive capital from institutions and TraFi.
Double’s mission is to lead the charge, with innovations, to displace CEXs and achieve AMM’s ultimate triumph. AMMs can beat CEXs, however to achieve this goal, AMMs need to attract massive capital from institutions and TraFi since there is not enough capital from degens and crypto natives. Institutions and TraFi deploy capitals based on risk-adjusted yields. If AMM LPing is not profitable especially on the risk-adjusted basis, AMMs won’t be able to attract the necessary capital to beat CEX.
The key challenge for AMM LPing profitability is the high risk associated with LPing, which is fair given that AMM LPing reward could be much higher than that from other sources — no risk, no reward. The major risk is widely known as impermanent loss (IL) risk or more recently LVR. Currently, there are two categories of solutions to reduce IL: 1) active liquidity rebalancing which has not proven to work; 2) hedging using options, perpetuals which has its limitation and may not be net profitable.
Double adapts the widely used marketing making agreement model for CEX onto AMM, and as a result, it can make most AMM pools offer “positive risk-adjusted yield” to Double’s capital providers. Hence, AMM LPing via Double (e.g. only supplying the capital side of an AMM pool) will be profitable on a risk-adjusted basis most of the time. Double achieves this by:
- Improve Capital Efficiency: Capital providers in Double supply 50% of an AMM LP position but keep 100% of the fee earned by the LP position.
- Reduce Impermanent Loss: Different from Uniswap v3 Concentrated Liquidity feature, which could improve capital efficiency by 10x but at the same time increase the IL risk by 10x, Double can significantly reduce impermanent loss (part 1, part 2) while improving capital efficiency.
- Offer Additional Yield: Through its Liquidity Mining 2.0 (LM2) program, capital providers in Double will double-dip, earning Double Dip Joy (DDJ) that has no premine, protocol native utility, and strong market demand.
By making AMM LPing profitable, Double will gradually attract more and more capital into AMMs, which will lead to better user experience for traders. Eventually, Double will propel AMMs to beat CEX for the majority of crypto trading.