Sommelier is a “Coprocessor for Ethereum” that automates liquidity providers' portfolios to maximize their yields. It aims to make liquidity providing (LPing) on Uniswap easier by providing tools that mitigate risks and reduce the time required to rebalance portfolios. Built with the Cosmos SDK and benefiting from IBC, Sommelier is a tool kit for LPs to reap the benefits of EVM compatible chains without paying high gas fees on Ethereum.
Sommelier provides liquidity providers (LPs) on Uniswap with better experiences and efficiently maximizes their yield. The project is packed with features to make LPing on Uniswap easier - on Uniswap v3, LPs need to manage their stake actively. This makes it extremely difficult to provide liquidity passively and earn a decent return.
On Uniswap v3, with concentrated liquidity, LPs will have to monitor how prices move to place their liquidity. Selecting the wrong range means spending more on gas fees to move liquidity to a new position. Sommelier aims to help users with this issue.
Uniswap v3 features the concept of concentrated liquidity: liquidity that is allocated within a custom price range. In previous versions of Uniswap, liquidity was distributed uniformly along the price curve between 0 and infinity.
Think of it like this: when participating in liquidity pools, if the price of the assets in the pools fluctuates, the money LPs provide is fairly allocated across traders, no matter if the assets vary between $50,000 or $5.
Conversely, concentrated liquidity means LPs set parameters. Traders can only access their liquidity if the assets are between specific prices. This is also known as Range Order. Concentrated liquidity allows LPs to garner more rewards within that set range of prices. But it comes with significant drawbacks.
When the price of the asset falls out of the range, two things happen:
Sommelier can alleviate those drawbacks by measuring market sentiment, which predicts the range of prices, and through the introduction of Cellars, which automatically allocate LPs' capital. Sommelier also boasts tools to balance portfolios automatically, protect LPs against impermanent loss, and constantly adding small features to make LPing and Uniswap easier.
In Uniswap v3, where LPs must constantly monitor their positions in the market, LPs using Sommelier will be able to automate their liquidity positions. Strategies that SOMM token holders set through governance are known as ‘Cellars’. More specifically, they are Solidity contracts that manage the LP's capital.
Validators are the key to making Cellars run through querying Uniswap state data: usually, networks can deploy oracles to process and broadcast data to the network. However, Sommelier opted to leverage validators to pull in information on the Uniswap pools and use the Decision Module to determine the range of prices the liquidity in the pool needs to be directed.
This is where the bi-directional Ethereum <> Sommelier bridge comes in.
The bi-directional bridge was directly implemented to bring the rewards of LPing directly back to SOMM token holders. The Gravity bridge is a core function of Sommelier, for stakers have access to LPing on Uniswap. Validators will run Ethereum light clients to collect data and broadcast that information onto Sommelier.
Currently, there are 500 million SOMM tokens minted and in distribution. There is a possibility that Sommelier will have to mint more SOMM to refill the community pool as the project develops. 30% of SOMM tokens are in the on-chain treasury (which is the community pool), 40% of them are held by the Sommelier foundation, 20% are set aside for investors, and the remaining 10% are owned by the initial stakeholders who participated in the formation of the network back in 2020.
Inflationary rewards are primarily used to incentivize validators early on while the network slowly gains adoption. As a network is more widely adopted, validators are rewarded for their work through transactions by fees accrual from people using the protocol.
Sommelier is taking an alternative approach through launching without inflationary rewards. The core team wants to experiment with launching without an inflationary token. Usually, PoS networks launch with an inflationary aspect of their token. The team expects to turn on the inflationary rewards switch only when it is absolutely critical for the vitality of the network.
Cellars will operate a management fee mechanism ultimately directing generated profit back to the chain. Cellars take tokens generated as revenue, move them into the Gravity Bridge and then use the Cosmos distribution module to share them amongst the delegators of each validator. In turn, SOMM stakers will gain in proportion to all other stakers of those fees.
As an example, if $1 million is collected in ETH, it is taken at a 20% fee rate, making $200,000 in revenue. The same $200,000 would return to the chain and be deposited into every SOMM holder's account as SOMM-ETH. Those users would be able to transfer and interact with SOMM-ETH on the SOMM chain, sell it on Uniswap, or exit to a centralized exchange, and so on.
SOMM tokens can be used for voting on governance proposals, staking, and rewarding liquidity providers. SOMM token holders will be able to decide which pairs on Uniswap v3 can become Cellars. Cellars can exist on any chain that has an EVM execution environment. This, in turn, will allow token holders to have direct control over the opportunities available for them to make yield.
SOMM governance puts token holders in control of how they want to implement the features available on the network. Not just new Cellars, token holders will propose support for new chains and have direct control over the community fund. This allows community members to dictate the direction of the network through their research and expertise. Sommelier offers a robust set of tools for token holders so that LPs can choose their adventure when it comes to DeFi yields.
The Cosmos ecosystem benefits significantly by adding more DeFi legos, like Osmosis, Juno, and Agoric. Sommelier is the latest in Cosmos SDK-based DeFi applications to launch on mainnet with IBC, so once users earn their SOMM rewards from Uniswap, they’ll be able to transfer them onto other Cosmos SDK chains or keep them on the Sommelier chain.
The team also has their eyes on the other DeFi applications for the Sommelier bridge, including reaching Solana or other L1s centered around other DeFi markets. With the upcoming deployment of community-elected Sommelier Cellars, we expect to see further development and expansion of the Sommelier ecosystem.