• Data and information current as of 7/14/2022:

The Arbitrum network has seen an explosion in users, transactions, and TVL over the last few months (Dune Dashboard - Arbitrum Stats).

Many important DeFi protocols have launched or are planning to launch on Arbitrum to take advantage of the lower fees and faster transaction confirmations.

Umami Finance is building a series of risk-hedged strategy vaults on the Arbitrum network. The protocol aims to provide sustainable passive income to vault depositors in the form of either ETH or USDC. No strategy vaults are yet available for use, although their USDC vault has recently passed phase 1 of an audit conducted by Zokyo. Currently, their only products are ‘Marinate’ and ‘Compound’. Umami holders can stake their tokens in ‘Marinate’ and receive yield in WETH generated from Umami’s Protocol Owned Liquidity (POL), which will be deployed in various farms and liquidity positions throughout the Arbitrum ecosystem. Once the strategy vaults are operational, stakers will also receive a portion of the fee revenue generated by the vaults. Marinate stakers will receive the mUmami receipt token upon staking. They may then choose to stake their mUmami tokens in Compound which will accrue the WETH rewards owed to Marinate stakers and then use that WETH to market buy and deposit more Umami into Marinate. Over time, each cmUmami token will represent an increasing share of mUmami tokens. Therefore, Compound will have a higher APY than Marinate, and it should also provide steady buy pressure for the Umami token.

Learning from the example of some DeFi projects that suffered after over inflating their token supply, Umami will use a zero-emissions model with a max supply of 1M tokens. Currently, 509,785 (50.98%) tokens are staked in Marinate (Dune Dashboard - Umami Stats).

Umami has ~$4.5M in its treasury, which is deployed to farms, vaults, and liquidity positions across the Arbitrum ecosystem. Half of the profits from the POL will be retained to grow POL, and the other half will be distributed to Marinate stakers. The gross yield for the treasury assets in June was $78,223, which equates to an APR of 22%. The treasury’s assets did depreciate during June, but only about half as much as the overall market. Previously the treasury had a goal of hedging 50% of its market exposure, however, this has been changed to 75% given the unusual volatility in the market.

Umami’s risk-hedged vaults will make use of another popular protocol on Arbitrum, GMX. The GMX platform allows for leverage trading and swaps, and the liquidity for these trades is sourced from a liquidity pool whose receipt token is called GLP. The liquidity pool contains several assets and is like an index fund in that it has target weights for each asset, but the mix of assets can vary over time. Around 50% of GLP is composed of USD stablecoins. On the Arbitrum chain, GLP currently is around 50% stablecoins with the remainder being mostly BTC and ETH. GMX’s liquidity pool is different than the AMM liquidity pools we see on various DEXs. GLP’s pool of assets is not priced based on bonding curves, but rather oracle prices. This means that traders can exchange tokens with no slippage, rather than experiencing the often high slippage associated with AMMs. Users can stake any of the tokens currently in the liquidity pool and in exchange receive the GLP receipt token. 70% of the trading fees generated on GMX on the Arbitrum network are redistributed to GLP stakers, which has resulted in quite high but variable APYs. Though GLP’s price volatility should only be about half that of the crypto market due to its ~50% stablecoin position, it will still experience some volatility and principal loss is certainly possible.

Umami intends to build its USDC vault on top of this GLP token. Their plan is to accept user deposits in USDC, and stake a portion of the USDC for GLP as well as use a portion to purchase hedging tokens created by the TracerDAO protocol. TracerDAO is another protocol on Arbitrum that offers leveraged trading. These TracerDAO tokens will hedge out GLP’s non-stable exposures, and the result will be a delta-neutral position. Umami will then collect the APYs from the long GLP position as well as any yield earned from the TracerDAO tokens (which represent short positions). The combined yield will be passed back to depositors as USDC, and Umami believes a 25% APY is achievable.

There are lots of innovative DeFi protocols running on Arbitrum. I think that Umami’s strategy of building products on top of existing DeFi protocols is very forward-thinking. In the event that something happens to GMX, Umami could pivot and potentially provide other delta-neutral strategies. The products available to hedge or short various tokens is only growing, so a generalized strategy would seem appropriate. Umami also recognizes the importance of being cross-chain friendly and will integrate a bridging protocol into its web app. This will allow the movement of tokens from most major chains to Arbitrum. Additionally, Umami has integrated the Banxa app, which allows users to purchase crypto with fiat.

The usage of Umami’s staking vaults and the Umami token’s number of unique buyers suggests increasing interest in the protocol. As mentioned, 509,785 Umami tokens are currently staked as mUmami. A total of 221,381 tokens are held in 2 Treasury wallets. Only 36,650 tokens are in the Umami-ETH liquidity pool on Uniswap. There are other Uniswap liquidity pools containing Umami, however, these other pools have extremely low liquidity. So only a little more than 36,650 tokens out of 1M are currently available to be purchased. The +- 2% depth is around $21,400 according to Coingecko. These low levels of available liquidity mean that the price of the Umami token could move quite violently in response to significant buy/sell pressure. Given that the whole crypto market is down significantly from its all-time highs, and that Umami itself is around 90% down from its ATH, the price of Umami could be poised to explode upwards once macro conditions improve. Also, the team announced that due to high anticipated demand for their soon-to-be-released USDC delta neutral vault, they will be implementing a whitelist. Though still not a guarantee, whitelisted addresses will have a higher chance of gaining entry to the USDC vault. The requirement for whitelisting is to hold cmUmami tokens, with larger holders entitled to larger USDC deposit limits. 1000 cmUmami tokens are required to be whitelisted for up to $125,000. At a current price of around $15, a single 1000 token purchase would come close to moving the price up by 2%. This short-term demand catalyst along with the anticipated high yield on the USDC vault should help to drive buy pressure in the short term.