Application for Optimism Season 9 - Growth Grants

Gamma Strategies

@bpgamma

300000

0xfEc5aA835250104178733980D88358F508e32940

Gamma is a user-focused, permissionless liquidity management system for Uniswap v4. One of the advents of Uniswap V4 is the ability to use custom hooks to increase yields to LPs through dynamic fees or backrunning capture in MEV. With our new Gamma V2 vaults, our users are able to choose easy-to-use custom liquidity shapes, automated rebalancing, and integration with V4 hooks for dynamic fees and backrunning MEV capture. These features take concentrated liquidity to the next level by allowing users to be maximally capital efficient with their liquidity while also earning backrunning MEV profits and lowering LVR costs. In this proposal, we are aiming to incentivize lending pools that can benefit the most from our liquidity management system which is mainly ETH/USDC and ETH/WBTC. The behavior being incentivized is liquidity provision into Gamma V2 vaults that actively manage concentrated liquidity on behalf of depositors while still preserving user choice around how that liquidity is managed. We will be utilizing Merkl campaigns that allocate incentives towards maximally concentrated positions allowing for the highest liquidity depth per $1 of TVL. Trading is thus incentivized indirectly via a lowered price impact, as larger trades can be serviced with greater liquidity depth. Each user who deposits with Gamma has full access to position analytics, fees earned, 24 hour metrics on volumes generated, and a variety of rebalancing/auto-rebalancing options. See [Example Position](https://app.gamma.xyz/v2/vaults/manage/op-mainnet/0x304CDF416cF4799d7d6218d4165328ce510Cd81F?action=Automation). We are optimizing for liquidity retention after the incentives end by offering users reduced LVR and value-creating execution at the smart contract level. We're implementing [Reflex MEV's](https://reflexmev.com/) Uniswap V4 hook contract into our liquidity management system and redistributing all backrunning profits back to the LPs as additional incentives on top of the OP incentives. Lastly, we conducted an analysis of the Lending collateral and DEX pairs on Optimism. See our Dune Dashboard below, which we will reference throughout this application. Dune Dashboard: https://dune.com/gammaxyz/gamma-strategies-lending-analysis-on-optimism Dapp: - https://app.gamma.xyz/

| Token Pair | DEX | Chain | Pool Type | Fee Tier | |--------|--------|--------|--------|--------| | ETH/USDC | Uniswap V4 | OP Mainnet | CL | 0.035% | ETH/WBTC | Uniswap V4 | OP Mainnet | CL | 0.025% Our main rationale in choosing these pairs is that they're by far the largest source of liquidations on OP Mainnet. (Source: [Gamma Dune Dashboard](https://dune.com/gammaxyz/gamma-strategies-lending-analysis-on-optimism))  In the past 12 months, there were $8.5M liquidations on WETH (WETH + wstETH), and $3.9M liquidations on WBTC. Additionally, the vast majority of the non-USD collateral is in these 3 assets:  For the purposes of this analysis, WETH + wstETH were grouped because the liquidation path for wstETH on Aave, Compound, and Morpho involve redeeming wstETH for ETH and then selling into WETH-USDC. **Why would we choose ETH/WBTC over WBTC-USDC?** - 1. On Aave particularly, you see quite a bit of ETH being borrowed against WBTC directly. ETH is the highest borrowed asset other than USDC, so you'll likely see WBTC being liquidated for ETH. - 2. For USDC borrows against WBTC, you can kill two birds with one stone by creating a very capital efficient WBTC --> ETH --> USDC route. Because ETH --> USDC has the most liquidity, you would be facilitating both WBTC liquidations against ETH and USDC. - 3. ETH/WBTC is highly correlated with higher Fees / TVL than WBTC/USDC, so you'll likely get more capital efficient liquidity and higher liquidity retention after incentives end.

All of these assets are used as both collateral assets and borrow assets on lending markets | Asset | Lending Market | Collateral Amount | Borrowed Amount | |-------|---------------|-------------------|-----------------| | WETH + wstETH | Aave V3 | $32,619,832.03 | $14,879,945.09 | | WETH + wstETH | Compound V3 | $6,315,160.79 | $3,071,369.64 | | WETH + wstETH | Morpho Blue | $506,674.26 | — | | WBTC | Morpho Blue | $17,399,011.55 | — | | WBTC | Aave V3 | $14,637,129.69 | $880,598.91 | | WBTC | Compound V3 | $6,883,322.69 | — | | USDC | Aave V3 | $7,504,099.92 | $11,796,944.93 | | USDC | Compound V3 | $1,138,856.12 | $1,636,844.45 | | USDC | Morpho Blue | $2,854,300.11 | $17,956,488.62 | | USDT | Aave V3 | $2,087,258.05 | $3,799,230.48 | | USDT | Compound V3 | $1,086,317.38 | $2,535,394.85 | | OP | Aave V3 | $721,993.80 | $53,110.19 | | OP | Compound V3 | $51,502.41 | — | ## Collateral vs. Borrow Role Per Pair On Optimism's lending markets (Aave V3, Compound V3, Morpho Blue), these assets serve distinct roles: **Collateral assets**: WETH, wstETH, and WBTC are the dominant collateral types. Across all three lending protocols on Optimism, they represent over $70M in deposited collateral ($33M WETH+wstETH, $35M WBTC on Aave and Morpho combined). When positions become undercollateralized, liquidators must sell this collateral into liquid DEX pairs to complete the liquidation. **Borrowed assets**: USDC is the most borrowed asset at $31M outstanding across all three protocols. Borrowers deposit ETH/WBTC as collateral and borrow USDC. When these positions are liquidated, the collateral (ETH or WBTC) must be sold for USDC to repay the debt. Please see the detailed summary breakdown in the Dune Analytics dashboard Source: [Gamma Dune Dashboard](https://dune.com/gammaxyz/gamma-strategies-lending-analysis-on-optimism)  

| Pair | TVL (USD) | Avg Daily Vol 30d (USD) | Vol/TVL Ratio | |------|-----------|------------------------|---------------| | **WETH-USDC** | **$5,794,707.62** | **$8,813,047.37** | **1.52** | | **WBTC-WETH** | **$678,862.22** | **$1,332,595.40** | **1.96** | | WBTC-USDC | $2,589,478.50 | $785,279.05 | 0.30 | | OP-USDC | $333,618.45 | $125,161.16 | 0.38 | (We added WBTC-USDC and OP-USDC just as other reference pairs)   Source: [Gamma Dune Dashboard](https://dune.com/gammaxyz/gamma-strategies-lending-analysis-on-optimism)

## Incentive Design ### Distribution Structure | Pair | Chain | OP Allocation | OP/Week | Run Rate Reward APR | Implied TVL | |------|-------|---------------|---------|---------------------|-------------| | ETH-USDC | Optimism | 200,000 OP | 7,692 OP | ~20% | ~$1,820,000 | | ETH-WBTC | Optimism | 100,000 OP | 3,846 OP | ~10% | ~$1,820,000 | | **Total** | | **300,000 OP** | **11,538 OP** | | **~$3,640,000** | *Assumptions: OP price = $0.13, 26-week distribution period.* ### Who Receives Incentives Incentives are distributed exclusively to liquidity providers (LPs) via Merkl reward distributions, which allocate rewards proportionally based on fee generation. Traders do not receive incentives directly. ### Why These Pairs and How They Improve Liquidation Routing **ETH-USDC** is the primary liquidation highway on Optimism. Over the past 12 months, ~$5.9M in WETH and ~$1.7M in wstETH collateral was liquidated on Aave V3 alone. All ETH-denominated collateral liquidations require ETH-USDC liquidity to settle into the borrowed stablecoin, and wstETH and WBTC liquidations also route through this pair to reach stablecoin settlement. Deeper ETH-USDC pools reduce slippage on these liquidations, improving health factor recovery and reducing bad debt risk for lending protocols. A higher reward APR (~20%) is necessary because ETH-USDC LPs bear the greatest loss-versus-rebalancing (LVR) cost due to the low correlation between ETH and USDC. **ETH-WBTC** is chosen over WBTC-USDC because it serves a dual routing function at higher capital efficiency: 1. **Direct liquidation demand**: $14.9M in ETH is actively borrowed against WBTC collateral on Aave V3, meaning WBTC liquidations frequently settle directly into ETH. 2. **Two-hop USDC routing**: For WBTC collateral liquidations against USDC borrows ($1.9M liquidated on Aave in 12 months), a deep ETH-WBTC pool combined with existing deep ETH-USDC liquidity creates a capital-efficient WBTC → ETH → USDC route, serving both liquidation pathways with a single incentivized pool. 3. **Higher liquidity retention**: ETH and WBTC are highly correlated, generating a 1.96x daily volume/TVL ratio vs 0.30x for WBTC-USDC. This means each dollar of incentivized TVL generates more trading activity, requires a lower incentive APR (~10% vs ~20%) to attract equivalent TVL, and is more likely to be retained after incentives end due to lower impermanent loss. ### Why This Design Creates Sustained Liquidity These are not standard constant-product LP pools. The incentivized pools are hooked pools on Uniswap V4 with structural advantages that reduce LP costs and improve retention: - Dynamic fees that adjust to market conditions, improving LP returns during volatile periods - LVR-reducing backrunning transactions that capture arbitrage value for LPs rather than ceding it to external MEV searchers, directly reducing the primary cost of liquidity provision - Active management of tick ranges to maximize capital efficiency and fee capture These features structurally lower the breakeven APR required to retain liquidity, meaning incentivized TVL is more likely to persist after the incentive program concludes. ### Anti-Extraction Measures **Wash trading prevention**: Incentives are distributed solely to LPs based on fee generation, not trading volume. A wash trader would need to pay trading fees on every round-trip without receiving any incentive benefit, making the strategy economically unsustainable. **Mercenary liquidity and JIT prevention**: Merkl's distribution system requires LPs to remain staked for a sustained period before earning rewards. This eliminates just-in-time (JIT) liquidity strategies and single-tick farming, where LPs provide liquidity for only a few seconds around a trade and withdraw immediately. Short-duration positions are effectively excluded from reward eligibility, ensuring incentives flow to committed liquidity providers who deliver sustained depth to the market.

**Track Record**: Gamma is one of the top 12 DeFi liquidity managers with $5.87M in TVL across our V1 vaults. We have been managing on-chain liquidity since 2021, scaling to $120M in TVL at peak, across multiple chains and DEX versions. **V2 Architecture**: Our V2 MultiPositionManager is purpose-built for Uniswap V4 and has been rigorously audited by Guardian Audits. Key capabilities: - Capital-efficient liquidity shapes (Gaussian, Exponential, Triangle, Camel, Uniform) that maximize fee capture while minimizing impermanent loss - Native V4 hook integration for dynamic fee adjustment and LVR-reducing backruns at the protocol level - Multi-position management where a single vault manages multiple tick ranges simultaneously, rebalancing for optimal capital deployment - Integrated with Uniswap's canonical routers for optimal trade routing and execution efficiency - Compatible with AI agents for autonomous liquidity optimization **Deployment Status** Our Uniswap V4 MultiPositionManager contracts are audited and deployment-ready. The contracts, factory, and strategies (Gaussian, Exponential, Triangle, Camel, Uniform) have completed their Guardian Audits review. Pool deployment on OP Mainnet will occur at the start of the incentive program. The baseline metrics referenced in this application (TVL, volume, liquidations) reflect the current state of these pairs across all Optimism DEXes, establishing the market context our incentivized V4 pools will operate within. **Audit Report**: [Gamma MultiPositionManager Audit Report](https://github.com/GammaStrategies/GammaV2/blob/main/audits/Gamma_Gamma_MultiPositionManager_report.pdf) **Grants-as-a-Service**: None. All work is performed directly by the Gamma team.

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