Introducing the Sommelier swETH Vault | A Twitter Space with Sommelier Finance
How the Turbo swETH vault works, and why you should consider depositing.
Aug 28, 2023
Our Turbo swETH vault is live on Sommelier and currently offering 2x Pearls until 23rd September.
To celebrate, Swell’s Chief Liquidity Surgeon Abi was joined by Sunand from Seven Seas, Stephen from Define Logic Labs, and Josh from Sommelier Finance to discuss how the vault works and why you should consider depositing swETH. In case you missed it, here are the top questions from the event:
What is Sommelier Finance and how do your vaults differ from others in the market?
Sommelier is a platform for cutting edge vaults that ingest real-time market information and then dynamically adapts to market conditions. These vaults track a large set of lending or yield opportunities, and then reallocate and rebalance accordingly.
As these vaults are intelligent and adaptable, they can offer more than just a single type of strategy which can tend to stale over time. Instead, what Sommelier has allowed is vaults that are intelligent and adaptable so that they can enter new strategies and yield opportunities over time as these landscapes change.
From a technical perspective, Sommelier is its own L1 Cosmos chain that sits outside of Ethereum. The computation, i.e. tick optimization and optimal leverage, is completed offchain by a team of strategists, which in the case of the turbo swETH vault are Seven Seas and Define Logic Labs. The strategists run the models to come up with the optimal tick range which is first submitted to the Sommelier chain.
Once this step is completed, the Sommelier validators come to consensus, and if consensus is reached, the rebalance message is passed to the Ethereum chain where users are interacting. The reason it uses Cosmos technology is to execute tasks that cannot generally be done within an Ethereum smart contract.
Tick optimization seems to be fundamental to the swETH vault. Why is this important?
Sommelier was created to address the problem of DeFi applications becoming increasingly complex, with the goal to provide better user experience. We observed that the process of entities providing liquidity was a complex problem and traditional Yearn-like architectures aren’t able to keep up with the rate of progress.
Our strategist teams at Seven Seas and Define Logic Labs have significant Uni v3 experience and we have significant data infrastructure which allows us to operate the vault and take a significant part of the yield that comes from Uniswap v3 tick optimization.
Essentially, the Sommelier vault acts as a professional liquidity provider, and we are excited to bring this key value proposition to the Swell community.
Why would a liquidity provider choose to deposit in the Sommelier vault as opposed to a concentrated liquidity pool?
There are a few reasons why, one being incredibly optimized liquidity. This means reduced slippage, reduced price impact with better swap ratios, and higher levels of volume capable of pairing with other tokens.
With tick optimization, the vault has a narrow range that is optimized multiple times per week, such that even despite lower levels of liquidity, our vaults will tend to attract more volume than other protocols.
One of the reasons why an LPer would want to deposit is because the vault will be able to generate more fee revenue, which is organic yield in swETH and ETH.
It is also important to add that tracking all of the different liquidity providing opportunities across the DeFi market can be time consuming. The Turbo swETH vault really simplifies the experience for the Swell community, as it handles all of the complexity to make sure it is getting the optimal yield. This can be particularly useful for small depositors that are looking for ways to earn organically without having to pay any ongoing gas costs.
It was mentioned previously that the vault has the ability to help the swETH peg. How does this impact vault users?
The best thing for a peg defender is the ability to have an efficient liquidity provider that is able to respond to various changes in the market. The swETH vault accepts ETH as a deposit asset, the main reason for this is that it creates buy pressure for swETH. If the vault were to accept swETH as the deposit asset then users will need to sell swETH to be able to LP.
The issue in the Swell ecosystem right now is that, as a new protocol, there is not a lot of available ETH and a lot of the liquidity pools lean heavily towards swETH as the deposit asset. The Turbo swETH vault can capitalize on small depegs and buy large amounts of swETH when it depegs. We are very optimistic that this will be an efficient liquidity solution in the Swell ecosystem. The goal here is to make the markets more efficient, making it easier for users to enter and exit from their swETH positions, and let users LP in a gas efficient way whilst benefiting from the growth of Swell and the organic volume that it generates.
When users hear the term ‘depeg’ they may think of it as something severe. Can you discuss ‘micro depegs’ and how taking advantage of these can enhance the performance of the vault and benefit users?
One thing that you should know about LSTs is that almost all of them are depegged by some small or large percentage. Our team of data analysts can run off chain computation that can determine the average peg ratio for the asset, and we can set parameters for the vault that allows it to enter at a favourable peg ratio. This allows it to receive intrinsic value appreciations just from mean reversion back to where the peg tends to be.
How does the vault evolve its capabilities as swETH is integrated with new protocols?
The vault has a set of adapters, and those adapters integrate with different protocols. If swETH was listed on a protocol where governance has decided to integrate the vault, then it could deposit into strategies that utilize those protocols.
For example, there could be adapters that are built into several other protocols, that allow the vault to tap into any of those specific pool yields at any given time — thereby creating an index of yields that is much more scalable than a single strategy vault.
What strategies will the vault be deploying at launch and what are some of the strategies that are planned down the line?
Initially the vault is going to be doing Uni v3 management as we see it as the most interesting strategy. As Swell integrates with more DeFi protocol, there will be more interesting strategies to be explored.
How can I get 2x Pearls for depositing in this vault?
To get the bonus Pearls, simply deposit in the vault and bond your LP tokens. Note that Pearls for this vault will not show in real-time, and will be added retroactively to your balance at a later date.
Thank you to everyone for attending this Twitter Space.