How Wombat works

Wombat improves upon the stableswap concept introduced by Curve with single-sided liquidity and a modified AMM algorithm. The key concept underpinning Wombat's design is asset liability management (ALM). With a traditional AMM, users who provide liquidity receive LP tokens in return that represent partial ownership of a pool. Liquidity pools consist of two or more assets. By design, trades against that pool adjust the balance over time. So when LPs withdraw their assets, they often receive a different amount than they originally deposited due to impermanent loss. With ALM, Wombat records the liability upon a user deposit and is given LP tokens matching the exact amount and token deposited. This allows each token to grow organically through supply and demand.

How Wombat makes money

Wombat charges a series of fees on its platform including swap fees (haircut), deposit/withdrawal arbitrage fees, and a coverage ratio fee. The haircut fee varies by pool and is used to support and incentivize the platform's operations. Currently, all fees are retained in the pool as a reserve. A portion of this fee may be shared with LPs in the future. Wombat implements a withdrawal fee to deter arbitragers from draining funds from the pool that can harm the protocol's long-term financial health. Similarly, the protocol also charges a deposit fee to counter such attacks. All deposit and withdrawal fees also remain in the pool and are used to keep the system at equilibrium. Lastly, Wombat introduces a coverage ratio fee that is applied on top of the normal haircut of a swap. This serves to discourage users from swapping in order to prevent riskier assets from draining other assets on the platform.

How you make money on Wombat

You earn swap fees for providing liquidity on Wombat. Currently, all rewards are paid in inflationary WOM token emissions. In the future, LPs will also earn a portion of swap fees. You can also stake WOM (veWOM) to boost your liquidity mining rewards (paid in WOM).