A new multi-chain primitive from Zaki Manian, a leading engineer in the Cosmos ecosystem, could solve a sore spot for smaller decentralized finance (DeFi) investors.
Startup Sommelier Finance released a mainnet version of its “Ethereum Coprocessor” Wednesday, a tool for automating coins’ rotations in-and-out of DeFi positions.
“What we’re really talking about is taking a bunch of pieces – a Cosmos blockchain, a bridge technology called Gravity, the concept of an oracle between the Cosmos chain and the Ethereum chain – and saying we can leverage the power of a validator set to give Ethereum DeFi users new capabilities,” Manian said in an interview with CoinDesk.
To that end, Sommelier raised $3.5 million in a seed round joined by Standard Crypto, Multicoin Capital and Alameda Research in return for an undisclosed amount of SOMM tokens. Manian said the funds will be used for additional staffing and implementation of the protocol.
Manian said his newest venture is looking at how liquidity providers (LP) function in the $42 billion DeFi industry, with the intention of enabling DeFi minnows to swim with the whales.
“What is it like to be a liquidity provider in these DEXs? How do we provide wider access to the liquidity provider functionality? The first use case of the protocol is impermanent loss stop-losses on constant-function market makers like Uniswap and SushiSwap,” Manian said.
In certain conditions, DeFi coins placed in automated market maker (AMM) pools to earn yield can actually return negative values when compared with merely holding the underlying tokens separately. This is because, more or less, AMMs rebalance portfolios whenever a token is withdrawn from a pool during a trade.
For example, take the ETH/USDC pool on Uniswap. If you buy ETH from the pool with USDC, the pool becomes momentarily imbalanced until someone else swaps ETH for USDC. In certain smaller pools with less liquidity, assets lose yield over time instead of gaining it for providing liquidity.
Sommelier tackles that problem with automation. Protocol users allow the tech to yank funds out of pools suffering impermanent loss. Impermanent loss is detected by a grouping of oracle networks while custody is provided by Cosmos’ validator set where funds are ported over too. A batching function between LP positions and the Cosmos should enable cheap transfers as well, Manian said.
“Liquidity Providers (LPs) will be able to use Sommelier to author and execute complex, automated financial transactions, such as portfolio rebalancing, limit orders, as well as a host of other features that token holders have come to expect from centralized finance (CeFi), but that are not currently available in DeFi,” Sommelier said in a blog post shared with CoinDesk in advance.