The ever-growing world of decentralized finance is ushering us the way forward as a natural evolution of the banking industry that's been around since the dawn of humanity, shaped by the Knights Templars, and popularised by Wall Street. There is continued hope that one of these days – sooner rather than later, hopefully – that DeFi will make it to the mainstream. But as we'll look at our Sommelier Finance review today, is the $48-billion DeFi sector, in its current stage, truly ready?
It'll be a watershed moment when the day comes that DeFi reaches the masses, and you'll find every average Joe and Jane swapping tokens and lending out cryptos. Although, there's still a lot of challenges that lay ahead besides just understanding DeFi, and it's this that became the bedrock for Sommelier Finance's creation. Sommelier wants to build a new protocol that makes the life of everyone using DeFi protocol easier, cheaper, more accessible, and equitable than ever before.
Sommelier provides you with automation tools to elevate what's possible with trading and farming for yields on decentralized finance. As awesome DeFi might be on paper, there's a significant amount of evidence to suggest that it truly is in its early stages. Gas fees have unintentionally created a high-walled garden that only the richest DeFi investors can climb. But can Sommelier change up DeFi for the better? Well, read along our Sommelier Finance review to learn more.
What Is Sommelier Finance?
Sommelier Finance refers to itself as the “new coprocessor for Ethereum,” which in essence is a decentralized protocol built to offer investors – more specifically for Liquidity Providers (LPs) – tools to execute complex trades and automate transactions. This includes actions such as rebalancing their tokens portfolio, place limit orders on AMM trades, creating batched orders, and more. These sorts of tools have yet to be integrated widely within decentralized finance (DeFi).
This is surprisingly so, as many such tools have been around on centralized finance (CeFi) platforms for a very long time and are considered to be fairly basic features. Sommelier Finance hopes that these automation tools will help to level the playing field between the more high net-worth DeFi investors and the small-time investors by providing a new ‘computational machine' to maximize profits on their DeFi plays while minimizing gas fees.
In short, Sommelier is building in added features to augment Ethereum's DeFi capabilities. Founded very recently as of this Sommelier Finance review, they've just launched their main-net on the Ethereum blockchain in early-March 2021. Since then, Sommelier raised $3.5-million in a seed funding round participated by major venture capital funds, including Multicoin Capital, Alameda Research, Cygni Labs, and Standard Crypto.
What Are The Special Features Of Sommelier Finance?
By creating a co-processing computation protocol atop Ethereum, Sommelier is able to accelerate Ethereum's push towards greater scalability and ensure equitable access, especially in the realm of DeFi. Lately, the surge of new users onto Ethereum's blockchain has caused massive network congestions, which then leads us to high gas fees. It's therefore not an attractive proposition for investors to put $1,000 into a liquidity pool if they're going to have to pay $100 in fees.
And this is where Sommelier comes along, as they've built special tools for would-be liquidity providers to find the most profitable liquidity pools around with the best yields and lowest fees. In the meantime, Sommelier also makes sure to actively manage the tokens in those liquidity pools with its specialized automated signature management. One of its highlights is Sommelier's ability to actively monitor and route liquidity across to different DeFi protocols.
They have several unique features to make this happen, as we've discovered while writing this Sommelier Finance review. In order to fix some of the lingering challenges with Ethereum, Sommelier has integrated its protocol with the Cosmos blockchain. More specifically, the updated Cosmos Stargate chain as Sommelier's consensus layer, while also building a secondary bi-directional interoperable bridge to Ethereum, as well as an oracle between the Cosmos and Ethereum chains.
How Can Sommelier Finance Solve DeFi's Impermanent Loss?
Perhaps the most attractive potential use case with Sommelier Finance is its ability to solve the problem of impermanent loss, which has been a problem within the DeFi space. Impermanent loss is a scenario where liquidity providers lose value on their token deposit inside of a liquidity pool than what it was worth originally. Most DeFi decentralized exchanges (DEX) adopt the concept of an automated market maker (AMM), such as that used by Uniswap.
In an AMM, there are no order books for traders to trade against. Instead, traders will only need to trade with a liquidity pool, where tokens forming trading pairs are pooled together by liquidity providers (LPs). Meanwhile, a specialized algorithm tracks the supply and demand of a particular pool, which sets the price accordingly. There are several advantages to an AMM, one being that there's less price slippage, especially for tokens that have lower liquidity.
In return for providing their tokens into a liquidity pool, LPs then earn rewards from the tokens that they've staked. Usually, these incentives come in the form of earning a portion of the trading fees. The problem here is that there is a risk of ‘impermanent loss,' where the AMM's pool becomes temporarily imbalanced as tokens are being taken out of the pool, and instead of gaining yields, the LPs are instead losing value on their tokens. This happens mostly within illiquid pools.
Sommelier Finance solves this thanks to automation. When plugged into a DEX, Sommelier's protocol can detect when a liquidity pool is at risk of impermanent loss thanks to data provided by oracle nodes. Sommelier can then be programmed to pull those tokens out of the liquidity pool and into custody provided by a Cosmos validator set. There is also a batching function between the liquidity pool positions and Cosmos that would allow this transfer to be done cheaply, as well.
What Else Could DeFi Gain From Sommelier Finance?
But apart from just impermanent loss, Sommelier brings a lot more practical benefits to its protocol users to adapt to existing DeFi platforms. By using its decentralized app (dApp), users on Sommelier can choose to find the best liquidity pools for the highest returns and lowest fees. Sommelier also provides a new tool for automated portfolio rebalancing. Using this, users can automatically rebalance their holdings to enter high-yield pools and exit low-yield ones to maximize their returns.
As individual transactions on the Ethereum are expensive – especially so while Ethereum is breaking new all-time highs at the time of this Sommelier Finance review – Sommelier offers its users the simplicity of batching. By aggregating several transactions together using Sommelier, will help to reduce your gas fees. This is especially a highly sought-after feature for investors that have a lot of liquidity pools to monitor and manage, and move funds across.
Another upside that will reverberate across to the rest of the Ethereum ecosystem would be the increased flow of liquidity. Sommelier Finance has built-in tools for batching and roll-ups, along with their automation kits to best move around tokens to the best possible liquidity pools to maximize yields for investors. With this much automation, Sommelier's protocol could have the effect of opening up liquidity to move freely between platforms, thus potentially raising yields across different Ethereum-powered DeFi protocols.
How Does Sommelier Finance's Future Roadmap Look Like?
As of right now, Sommelier remains in its alpha stage, but you can already start interfacing with the early iteration of its dApp to join the top liquidity pools that Sommelier has found. As of writing this Sommelier Finance review, we found one DEOR/WETH pool with more than 520% APY yields, which shows that Sommelier's tools are indeed working. They may also, at some point, begin a sale of their native SOMM cryptocurrency tokens.
They do at least have a firm roadmap for the rest of 2021. As of Q1, Sommelier will be working to implement some new features, including deploying Uniswap and Ethereum oracles onto the Cosmos blockchain. Their concept of a bi-directional bridge called ‘Gravity' will soon be introduced, as well as a wallet integration for Ethereum and Cosmos. We'll soon get to see an app where Sommelier tracks impermanent losses in real-time.
Following that, Q2 and Q3 of 2021 will involve a lot of tweaking, as Sommelier is steadily launching their test-nets and audits and public invite for anyone to be a validator. Later on in the year, we could start seeing automated DeFi selections by Sommelier on popular platforms with the likes of Uniswap and SushiSwap, as well as being deployed on the Binance Chain. We'll also get to see the launch of Sommelier Finance's decentralized autonomous organization (DAO) too.
Sommelier Finance Review – Conclusion
So, how can we conclude our Sommelier Finance review? Well, as a newly launched protocol, there's a whole lot that we can't yet prove with Sommelier and whether they can accomplish any of their lofty ambitions. Not to mention, they'll no doubt come under a lot of intense competition from other protocols that offer automation tools for decentralized finance, with platforms such as CyberFi and DeFi Saver showing off their own take on automated portfolio management.
However, we can certainly harbor a lot of good hopes for Sommelier, as they are willing to go farther than what other platforms can do… In theory, at least. DeFi was built with the promise that it wants to make the once gilded financial and banking system more accessible. This means creating an ecosystem where anyone can earn and make money lucratively, not just the one-percenters. But ironically enough, DeFi's rise has made that accessibility much harder.
High gas fees have locked out many people from being able to join the DeFi revolution. Meanwhile, those already invested are crippled with inefficiencies and have a limited number of options where the flow of liquidity has benefitted only the top DeFi platforms. We learned now in our Sommelier Finance review that their automation tools won't just help its own users better optimize their earnings on DeFi, but also democratize that liquidity which will benefit everyone that wants to see DeFi succeed.
Sommelier Finance Review
Ease of Use
- Actively automated portfolio management allows users to best maximize returns on their token holdings, such as picking the highest yielding liquidity pools.
- Users can automate their trading on DeFi to safely avoid pitfalls and unseen risks such as impermanent loss.
- Integration of batching tools to aggregate transactions together to save on gas fees, as well as additional features like setting limit orders on trades.
- Promises to free up liquidity and spread it around across all DeFi protocols, allowing users more choices for attractive yields.
- Creation of a bridge that could open up for potential interoperability features between Ethereum and Cosmos.
- Potential competition from other automation tools for DeFi, as well as uncertainties as it has yet to launch in full.