Written by: Leo

LSDfi rose by relying on the upgrade of Ethereum, swept the entire DeFi field like a torrent, and brought about the LSD (Liquid Staking Derivatives) war. LSDfi means that the pledger can convert the pledged ETH into a tradable asset, thereby increasing liquidity, and LSD lowers the threshold for users to pledge ETH, any amount can be pledged, and LST can be obtained after the pledge, At the same time, it can be used to bring multiple benefits. While enhancing liquidity, it also solves the problem of idle ETH income in the hands of users, and also brings considerable TVL to many DeFi protocols that focus on the LSD track.

In addition to catching up with the upgrade of Ethereum, the explosion of LSDfi is more about solving the practical problem of encryption user income, so it has become an important part of the DeFi narrative. Today, I will explain in detail a new type of narrative—LPDfi (Liquidity Providing Derivatives—liquidity providing derivatives). This article will mainly introduce the existing problems of poor liquidity in the DeFi field and what practical problems the emergence of LPDfi has solved , Can it become the next big narrative of DeFi?

Liquidity issues of DeFi protocols

Previously, the release of Uniswap V3 significantly improved the capital efficiency of the DeFi market, but it also brought some liquidity problems. For example, liquidity providers through CLMM (Centralized Liquidity Market Maker) will face some strategic problems. The main problem of CLMM is that it needs to constantly rebalance LP positions to avoid impermanent losses. This strategy is often complex and difficult to execute.

There are also some agreements in the market that deal with algorithmic MM strategies by providing active liquidity management solutions. Such protocols are critical to CLMM. But for now, liquidity management protocols are only effective on a relatively broad scale. Many market makers try to avoid asset volatility by buying options, but the liquidity of DeFi options is also insufficient, and it takes a high price to hedge impermanent losses. In addition, for retail investors, the concept of options is more complicated. And in the DeFi field, there is no option basket that can well hedge the impermanent loss of active LP positions.

Another strategy for hedging against impermanent losses is to short volatile assets using Money Markets (AAVE or Compound), which works well but is less capital efficient. At present, all methods of hedging impermanent losses cannot realize the potential of Uniswap V3, which is also a problem that Logarithm Finance is working hard to solve.

Logarithm Finance and LPDfi

First, a brief introduction to Logarithm Finance. Logarithm Finance is a decentralized liquidity management and market-making protocol, designed for market makers and DeFi users. Users do not need to constantly manipulate their positions to find high APY, but can start from doing Profit from city activities.

The concept of LPDfi launched by it aims to transfer liquidity through various LPD cross-chains and hedge the risk of volatile assets, so as to achieve the highest available capital efficiency in the market. Logarithm Finance mainly provides liquidity for LP-centric agreements, actively manages LP positions and earns higher returns. The agreement is mainly aimed at earning automatic compound interest fees on Uniswap-like AMMs, and minimizes the risk of volatile assets by creating a Delta neutral strategy for short positions on composable DEXs.

Currently users can join its official DC and wait for the launch of the BETA version.

Logarithm Finance Products

Logarithm Finance will launch two main products - Nautilus Vault and Liquidity Shell. Logarithm will guide LPD liquidity (Liquidity Shell) and use Nautilus Vaults to hedge impermanent losses, playing an important role in the development of the entire LPDfi narrative.

Liquidity Shell - the main product of the LPDfi narrative

Logarithm Liquidity Shell helps Logarithm users increase their income by routing LP tokens to the best liquidity places in the market, and is also the main product that guides the emerging LPDfi narrative. In simple terms, Liquidity Shell can be considered as a yield aggregation platform or liquidity router, designed to provide Logarithm users with Provide the highest possible yield.

In addition to bringing high benefits to users, this product is also beneficial to other LPDfi protocols. Essentially, its liquidity channel mechanism can bring better liquidity to LPDfi protocols such as Panoptic and Smilee, which in turn can improve the liquidity of DEXs such as Uni V3. Additionally, Liquidity Shell removes the cost, risk, and complexity associated with liquidity mining. These different aspects of the LP process can be simplified because it is built on top of the LPDfi protocol.

In the future, Liquidity Shell also plans to enable the cross-chain function to improve the efficiency of LP routing, so that users can obtain a wider range of benefits, and bring liquidity to LPDfi protocols other than Ethereum and L2. Ultimately, Logarithm is committed to being the destination for LPD liquidity.

Liquidity Shell works by directing user deposits to the highest-yielding strategy agreement in LPDfi. To maximize efficiency, users will be able to deposit unilateral liquidity and decide whether to use the Nautilus Vaults strategy. If users choose to use Nautilus Vaults, their LP positions will be hedged using the GMX perps Delta neutral strategy. In addition, users can also choose to avoid Nautilus Vaults and only use Liquidity Shell, so that users will obtain higher benefits through the strategic deployment of Liquidity Shell assets.

Nautilus Vault - a derivative of the LPDfi Narrative

Nautilus Vaults is Logarithm Finance's first product where users can deposit USDC for high APR strategies. Logarithm Finance will use the logic of Nautilus Vaults to build other products, such as Liquidity Shell and leveraged LP mining, to unlock more liquidity for market makers.

The way Nautilus Vaults works is that users need to deposit USDC to Nautilus Vaults. There is no time limit for adding and withdrawing liquidity, but depending on market fluctuations, there may be a TVL limit. The size of Vaults depends on the available liquidity of the decentralized derivatives trading platform , Nautilus Vaults is committed to cooperating with other trading platforms to achieve the maximum market capacity of Vaults.

When USDC is deposited, the protocol opens active, highest-volume LP positions in a narrow range on Uniswap V3 while hedging against volatile assets using a decentralized derivatives trading platform. Backtest data shows that the APR of Nautilus Vaults exceeds 12%.

Users can choose auto-compound APR to obtain more significant benefits. All deposits are in USDC. In the future, Logarithm Finance also plans to build other products based on Nautilus Vaults. For example, create a one-stop liquidity management layer on an agreement with LP as the core.

LPDfi Development Prospects

In summary, the advantages of LPDfi include:

Aggregation of cross-chain liquidity is realized. By aggregating the liquidity on different chains, LPDfi breaks through the segmentation between DEXs and realizes cross-chain liquidity in the true sense. Users can move assets between different chains at any time.

Improve the efficiency of capital utilization. In LPDfi, the liquidity provided by users can serve multiple DEXs at the same time, improving the efficiency of capital utilization. Users not only enjoy ultra-high liquidity, but also earn more income.

Risk decentralization improves stability. LPDfi realizes risk decentralization through liquidity reserves on different chains. Compared with relying on a single platform, LPDfi is more stable and anti-risk.

Reduce slippage, improve transaction execution efficiency, liquidity aggregation reduces transaction slippage in LPDfi, lower transaction costs for users, and higher execution efficiency.

It can be seen that in the future, Logarithm Finance can become a cross-chain liquidity center, connect the entire decentralized trading network, and promote DeFi to a more advanced stage of development.

Introduction to some other LPDfi projects

In addition to Logarithm, there are some protocols involving LPDfi on the market:

Panoptic

Panoptic is a Uniswap-based options DeFi protocol that leverages Uniswap v3 liquidity positions for mint, trading, and market making of options available 24/7.

Limitless

Limitless Finance is a liquidation-free and license-free leverage tool built on Uniswap V3. It aggregates spot and lending liquidity under one framework to reduce liquidity fragmentation between transactions and lending. Limitless reduces impermanent losses and Provides higher returns for liquidity providers. Borrowers will be able to borrow against any liquid asset provided by the LP. They enjoy no liquidation and extremely high LTVs by paying a premium to LPs (lenders). Traders can use up to 2000 times leverage to go long/short assets without encountering forced liquidation on the price.

Smilee Finance

Smilee Finance is the first protocol for decentralized volatile assets, providing DEX-like liquidity to earn predictable USDC APR, hedging asset risks on the chain, and aiming to reduce impermanent losses. In addition, Smilee can also be used to construct entirely new volatility products, such as impermanent gains as opposed to impermanent losses - short LP positions to profit from impermanent losses.

Infinity Pools

Infinity Pools will not be introduced too much, you can refer to "InfinityPools: 1000 times leveraged non-clearing perpetual contract has come true?".