Providing liquidity on the decentralized finance (DeFi) interest rate swap protocol Voltz in return for rewards no longer requires active management of the position.
On Tuesday, Voltz, which recently passed $120 million in cumulative trading, announced in a press release the launch of a liquidity provider (LP) optimizer vault in partnership with Mellow Protocol to allow users to provide liquidity passively.
"This product will give traders the opportunity to earn passive LP returns without the risk of impermanent loss, an amazing development for Voltz and DeFi more broadly," Simon Jones, Voltz CEO and co-founder, said in a press release shared with CoinDesk.
All that liquidity providers need to do is deposit an asset in the optimizer vault. The vault then takes care of optimizing the leverage, selecting the tick ranges and rebalancing liquidity into new ranges as the price moves.
Liquidity providers on Voltz will not face impermanent loss, which occurs when the price of assets locked up in a liquidity pool changes after being deposited. That's because fixed and variable interest rates in a given Voltz pool are made in the same underlying asset. For instance, Voltz's staked ether (stETH) pool allows users to swap variable and fixed staked ether rates with leverage by depositing ether (ETH) as margin. Impermanent loss is common in DeFi pools that maintain a ratio of two assets.
However, until now, liquidity providers had to actively manage the margin, leverage and the tick ranges – perhaps an entry barrier to those who don't have time to keep track of the three variables.
"If you provide liquidity in narrow tick ranges, you also need to rebalance as the price on the virtual automated market maker moves. If you have the time to manage positions in this way actively, the flexibility is amazing and enables you to generate significant APYs," Jones told CoinDesk. "However, you are at a disadvantage if you don't have the time."
Mellow Protocol, an automated DeFi Strategy builder, has its own liquidity provider optimizer strategy to solve this problem.
The liquidity providers cannot withdraw funds until the end of the pool term. For instance, the stETH pool's tem ends on Dec. 31, which means users providing liquidity through the optimizer vault cannot withdraw their ETH before the new year.
"Voltz Protocol launching the LP Optimizer Vault with Mellow Protocol eliminates barriers for traders while mitigating risks in a simplified process," Nick S, core contributor of Mellow Protocol, said in the press release.
"The goal of Mellow is to build a robust ecosystem of tools for eliminating market inefficiencies while generating positive results for users. We believe LP optimization is pushing the boundaries of what was possible in TradFi and we're grateful to be working with the Voltz Protocol to advance the use case," Nick S, added.
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