Liquidity Provider Insights with Zaki Manian - Ep. 6 - Liquidity Providers Need to Gear Up for a Multi-Chain World

Ready to deconstruct what happened last weekend? Sommelier cofounder, Zaki Manion, discusses what you as a liquidity provider (LP) will find helpful as you make your way through steep but fruitful DeFi learning curve. Zaki provides some much-needed perspective for LPs in our Series: "Liquidity Provider Insights with Zaki Manian".

Sommelier cofounder, Zaki Manian, reports that Sommelier recently had a great weekend! He explains:

“We had $1.75 million in various tokens and liquidity added by the Sommelier app. It’s pretty exciting. People are using the app, people are running into problems. We saw a bunch of people whose MetaMask was configured for Matic [Polygon] run into some problems with our app. Every web3 builder is going to have to start providing the right interface nudges to change your MetaMask settings network to the right network. Remember, we’re moving into a multi-chain world.

Zaki thinks what’s happening at Matic (Polygon) reflects where we are as an industry.

“It’s interesting. Matic is like old Cosmos in many ways. It’s built off of tendermint and Cosmos SDK -- they had an early bridge. They’ve been bangin’ on the same software design since 2017. It was a little bit sad for a while because essentially Finance Smart Chain is like a clone of Matic architecture and Matic was not picking up use. It’s great to see Matic getting used.”

We’re seeing a lot more apps onboard users into Matic without even touching Ethereum. Zaki says:

“You see some very successful liquidity mining schemes riding on top of Matic with more to come. This is a great demonstration of multi-chain innovation. As you increase the number of blockchains that people can do the tasks that they want on it starts to bring down gas prices. Gas prices we saw over the weekend were not just everyone being drunk in Miami but also the maturing of the multi-chain space.”

Finally, all kinds of good UX problems to solve

Zaki encourages liquidity providers to explore the Matic (Polygon) for opportunities, but until it’s on Uniswap v3 they won’t find Sommelier. He explains:

“It’s a little bit challenging for us because there’s no Uniswap v3 on Matic for us to build support for so we’re focused on places where Uniswap v3 is going to show up. If that changes we’ll re-evaluate support in our app but there’s clearly some exciting stuff happening there.”

A six-year-old vision appears to be materializing. Now what?

“In general, this is really going to be a challenge for the web3 builder today. We are across the Rubicon into the multi-chain world and there’s no going back. The Gravity DAX is on chain, there are bridges between all of these things, your wall is connected to all kinds of crazy different networks. Honestly, it's going to be nuts. How are users going to know what assets they have on what chain, all of these things. All kinds of UX problems to solve. We’ve been waiting for this for six years -- and it’s here.”

Of course, there’s also a big opportunity for Sommelier to integrate with all these layer 2s.

So, what was the recent volume jump on Pairings by Sommelier all about?

Zaki observes:

“I think there’s a couple of things that are true. One is: I think Uniswap v3 is like your classic sort of biting the bullet on the innovator's dilemma -- disruptive innovation. It’s not ‘like Uniswap v2 but better,’ it’s basically a completely different product. We certainly believe that it’s a better product. And, we believe that this design direction is the future. That’s why at Sommelier we’re focused on it and trying to make this usable. But liquidity providers who are Uniswap v3 power users are still going to have to learn the ropes for Uniswap v3 and experiment. And so we see a couple of things. One is: You have a low-gas price weekend. So suddenly you have more sense that you’re going to make enough fees to at least offset the gas prices of going in and out of the rider position.

“The other thing is the market’s been sort of trending sideways for a while and so more people are looking for yield rather than just hodling. And then more and more people who are liquidity providers on Uniswap v2 are just trying to start to gain experience with Uniswap v3 and the usability improvements with the suggested ranges that we launched with the Pairings product as sort of the v1 of the Pairings product helped people get started. And, so that’s what I think we’re seeing.”

“I think we’ve built a really good onboarding experience. We both see liquidity moving through our system but we also see a lot of people exploring different pairs, looking at their suggested ranges. It’s a helpful way of making sense of where you should be as a liquidity provider. And, we’re improving all aspects of this. Work continues on automated rebalancing and we’ve got a bunch of new features coming next week.”

Zaki thinks there are going to be periods of low gas prices that come and go as the market is constantly shifting. He says:

“It’s unclear if we ever will move to a permanent low-price regime in Ethereum, but more and more places for people to transact are showing up. And as consumers have more options that at least creates a downward pressure on gas prices. And then you have an emergence of L2s on top of Ethereum as well, which have a good chance of triggering an order of magnitude reduction at least in gas prices just for an extended period for users.”

About Arbitrum

Arbitron, the newly deployed layer 2 approved by Uniswap, is in developer-only mode right now.

Zaki says: “We’ve been looking into this. Some of our team has applied for the developer program but there’s no public information right now about you even sync a bull node or anything, so we’re still in the early days.”

“Arbitron is a technology I’ve been following and excited about since the paper came out in 2018, I believe it was. I really liked that paper because it pointed out a lot of the flaws that I saw in Truebit. Arbitron was originally positioned as a better Truebit. So, I’ve been very excited about it. The team is very, very impressive -- it’s like some of my favorite computer scientists. Man, this is space age stuff. It’s mind-blowing that it works. Every time I look at this code base I’m just like ‘Holy Sh*t! I can’t you’ve built something like this. It’s a fully virtualized EVM [Ethereum Virtual Machine]. It’s amazing.”

He thinks a minute and adds: “I guess you had virtualization on IBM mainframes back in the ‘70s, so we’re slowly catching up with IBM mainframe technology.”

Sommelier will absolutely launch on Arbitrum. Zaki explains:

“I think the biggest tension that we feel is that concentrated liquidity versus passive liquidity are really two completely different product paradigms that are battling it out in the marketplace right now. There are certainly believers that passive liquidity is the right solution. We think that there’s a real opportunity in making the concentrated liquidity world really tractable, but as a result of focusing on that we go where concentrated liquidity goes. It’s really exciting that the Uniswap community really spoke clearly to the Uniswap Labs team, that concentrated liquidity should be on every true L2. And Arbitron is the first L2 that supports Solidity and contracts from the Ethereum main net that is a true L2 and I think it was very aligned with the values of Uniswap as sort of a core component of the Ethereum ecosystem to be there. Our values are very aligned with them.”

What’s next for a Sommelier?

The biggest, most long-awaited thing for Sommelier to produce is a position manager, ”but we’re not there yet,” says Zaki. “However, we have two long-awaited things that we saw the need for before we even launched, but you know, features take time. One is the introduction of editable ranges. So, the sort of back-end technical analysis that we are continuously working towards improving suggests a range, but sometimes the user has more insight. And these ranges are just really a starting part and an Alpha system and a bit of automated technical analysis to help people get started and not any way definitive about where people should put their liquidity, but it does sort of help correct a little bit trader’s mental biases about where they can put their liquidity with technical information. So, editable ranges are coming.

“And the second thing that I think I’m even more excited about just for the future of being a liquidity provider is we’re going to add deep thinking to Pairings. So that means that being a liquidity provider can now become a shareable, social artifact. You can share on your Twitter, in your Telegram chats liquidity positions you think are likely to be profitable, likely to be exciting. Take opportunities to get exposure to projects that you’re excited about. And, as more and more tokens start getting designed for the AMM world, social is an important way of filtering the noise. And, right now no one is providing a social experience around being a liquidity provider and Sommelier is going to be the first to do so.”

Helping liquidity providers discover

Sommelier’s thesis is that there are three audiences of liquidity providers. You see a lot of projects really focusing on these two use cases. Zaki explains:

“One group is the professional trading houses that are in your USDC, ETH, and other big payers. There are people whose job it is to manage all the bots, and allocate the liquidity, and allocate the trading ranges. It’s a full-time job for someone.

“The other is the light for light stable coin pair world where it’s very predictable where you should put liquidity. Fees are not as high but it’s an easy position to manage.

“And, Sommelier is focused on a third use case -- I like the project, I like the coin, I want exposure to the asset, whether it’s the latest meme coin or your cool new ETH futures contract -- whatever else is showing up in the Uniswap v2 world and I want to earn yield while supporting that project. That’s really what we’re all about. Like, everyone knows where to find USDC ETH, USDC Link these are the front pages of the internet. As you get into the long tail and you’re looking for those diamonds in the rough that’s when social becomes important.”

“The other thing is we are going to have a UI element in this release to remind people if their metamask is configured for networks we don’t support, so that piece of UI friction will get sorted out.”

Making pools shareable and easy-to-find seems to continue to help more users take advantage of Uniswap v3. Sommelier is a helpful partner when taking the plunge into a pool.