We have been fans of smart contract-based automatic market making products since the launch of Uniswap’s bounded V2 liquidity pools. The concept and execution is great, but we can do better.
By translating the methodology laid out in the white paper onto our order books, we have overcome many of the limitations of the smart contracts, and have added an exciting new feature.
- Flexibility – Rather than working on an RFQ model, our AMM pools spread liquidity across the entire range as limit orders, taking advantage of the fine resolution of the exchange’s flexibility.
- No Maker Fees – Because Power Trade charges no maker fee for PowerPools, the trades executed against them are frictionless, meaning that our clients pick up 100% of the mark-up (fee) they specified when creating the pool.
- No Network Fees – Because there is no smart contract involved, there are no network fees. This means our clients can create, modify, fund, defund and destroy pools at will with no costs. This allows them to re-adjust pools dynamically to maximize returns without worrying about paying more in gas fees than they are making – this is of particular benefit to “the hoard” of smaller participants who are currently priced out of the Uniswap market.
- More Efficient – PowerPools turn out to be more efficient than smart contract- based pools, because they are continually trading. In our tests we have observed between 15% and 100% higher yield. We believe that this is because PowerPools are continuously, relentlessly trading. They don’t wait for someone to want to exchange a block of money. They hold the trade out on the order book. If a client doesn’t take it, an arbitrageur will.
Live Test Results
Here is the graph of performance recorded by our live test pools over the past 60 days.
These tests have been run in an empty market, where the only counter-party has been a simple arbitrage robot. The robot only traded when it saw a 15bp arbitrage against our pool price and the wider market. The graph above shows the fee returns from the (wide) AMM pools under these non-ideal conditions. In fact, the arbitrage robot made as much money as the AMM, after paying exchange fees on both ends of the trade.
What does this mean? It means that in a liquid market with many active participants, PowerPools have returned a higher yield than selling the equivalent strangle with options...
Which leads us to our new feature.
Upcoming New PowerPools Features
Late Q1 2022, PowerPools will be further improved to allow automatic handling of the fee income on a periodic basis. The choices will include, but not be limited to:
- Reinvest the fee (in effect compounding theta and negative gamma).
- Collect the fee.
- Use a proportion of the fee to buy 1M and 3M fractional option strangles in order to hedge against impermanent loss, with strikes at the upper and/or lower bound of the pool.
- Use a proportion of the fee to buy 1M and 3M ATM straddles (a call and a put at the money), in order to build a ladder of positive gamma over time.
- Any combination of the above.
The effect of enabling the option-buying rules, particularly the ATM straddle rule will mean that over time, the PowerPool’s fees will be financing the building of a “long gamma” position with options.
Auto-Hedging Risks Through PowerPools
Liquidity pools are well known for the risk of “Impermanent Loss” (which we simply call “loss”). PowerPools will be able to auto-hedge that risk. In fact our tests show that after a few months of running a pool with this option activated, so much positive gamma will be built up that the owner of the pool will be praying for a Black Swan event to hit the market. Because if you’re sufficiently long gamma, then:
- A market crash yields profit!
- A rally yields profit!
And if you’re making more income from the pool than the cost of the time decay of the options, you’re also making money if the market stays within the pool’s boundaries.
Knowledgeable readers will immediately notice that these PowerPools will generate a lot of limit orders in our exchange. More than many exchanges would be able or willing to handle.
That’s OK. Our exchange tech has been built from the ground up, by experienced people who write global stock, FX and commodity exchanges in bare metal C++. Our stack is specifically designed to cope with this huge load. Other than planned upgrades, PowerTrade order books have so far enjoyed 100% uptime.
Of course the obvious question here is, “if your PowerPools are that good, why make them available for free?”. The answer is simple. We know how to make money from markets. We’ve been doing it for a long time. That’s not the point. What we are trying to achieve is to build the best environment on the Planet where you can make outsized returns without anyone in the way.
We’ll make our money, don’t worry. By using our pools, you are providing real, honest liquidity to our exchange, protecting the market against scam wicks (see note below). The buy pressure your pools put on the options markets will provide liquidity to people like the Gamma Boss, who are happy to take the other side of it for their own ends.
Looking forward to trading with you in 2022!
The PowerTrade Team
P.S. If you want to join our Beta tester telegram group to try this feature out earlier, ping us with your telegram username at [email protected].
💡 Scam Wicks: If whales want to move our market about for their own ends, rather than being the ones who pay, you are the ones getting paid.
We'd love to hear from you! Want to see some new features? Send your feedback to [email protected] anytime!