Problem & Solution

The shell of Nautilus follows a logarithmic spiral pattern, where the distance between the whorls increases logarithmically as the shell grows larger, while the angle between the tangent line and the radius vector remains constant.

Uniswap V3 LP farming limitations

With the release of Uniswap V3, capital efficiency has improved significantly, but the difficulty of working with CLMMs creates a barrier to liquidity providers to supply their assets. The main limitation of CLMM is that it requires a constant rebalancing of the LP position to avoid impermanent loss. It is a complex, unpredictable strategy and is usually executed incorrectly.

There are protocols on the market that deal with algorithmic MM strategies by providing active liquidity management solutions. Such protocols are necessarily crucial for working with CLMMs. As for today, liquidity management protocols are only effective on a comparatively wide range.

Many market makers try to avoid volatility by purchasing options, but DeFi options are not liquid enough and can be expensive for hedging impermanent loss risks. In addition, options are a complicated product for a regular user. In DeFi, no options basket fully hedges the impermanent loss of an active LP position.

Another popular strategy for hedging impermanent loss is shorting the volatile asset using money markets, such as AAVE or Compound. This strategy works great, but it’s less efficient regarding capital use. Logarithm will be also using this strategy with specific vaults.

Solution

None of the impermanent loss hedging methods currently unleash the full potential of Uniswap V3. Logarithm Finance solves this. We make strategies that allow everyone to farm LP fees permissionless on a very narrow LP range using CLMMs, squeezing the maximum APR out of liquidity.

Logarithm Finance has developed its hedging model to avoid volatile assets' price exposure by shorting them with on-chain perps. This method only recently became possible when decentralized derivative exchanges such as GMX started to deploy on the same layers as AMMs, making them inter-composable with each other.

The protocol relies on the internal state of the AMM and Derivative DEX to determine the current exposure of position and choose the right size for hedge. Due to Arbitrum's low transaction fees, rebalancing can be done very frequently to eliminate price exposure, even during the highest price fluctuations.

Logarithm Finance automatically selects the most efficient rebalancing frequency depending on the market volume and volatility, while leverage determines the maximum possible capital utilization. In addition to rebalancing, the protocol collects and auto-compounds fees to boost APR. All this allows Logarithm Finance to create a completely transparent and decentralized new infrastructure for market making.