Macauley Peterson

Retail investors, priced out of Ethereum mainnet by high gas fees and shifting their attention to layer-2 rollups, now have a 1-click yield vault option on Arbitrum, courtesy Sommelier Finance.



The first foray into Arbitrum One will be Sommelier’s Real Yield ETH vault, which generates yield by providing liquidity and taking leveraged positions on staked ether (<a href="https://blockworks.co/price/eth">ETH</a>).



The DeFi protocol, built as a Cosmos app-chain, was technically already multichain.&nbsp; Its initial vaults — called “cellars” — are on Ethereum mainnet, while managed via the native app-chain. Since launching in April 2023, <a href="https://blockworks.co/tag/sommelier">Sommelier</a> has attracted around $71 million in deposits across a growing list of vault offerings, data from DeFi Llama <a href="https://defillama.com/protocol/sommelier">shows</a>.



The planned expansion to Arbitrum was announced in May 2023 and caps two years of research and development work, according to Sommelier co-founder Zaki Manian, and the protocol is targeting more chains later this year.



“We&#8217;ve had to glue together, <a href="https://blockworks.co/tag/ibc">IBC</a>, <a href="https://blockworks.co/tag/axelar">Axelar</a> [general message passing], <a href="https://blockworks.co/tag/chainlink">Chainlink</a> [cross-chain interoperability protocol] all like working together in this machine,” Manian told Blockworks. “Ultimately, it will deliver this user experience where you can feel like you are being part of a native layer-2 experience, but it&#8217;s really getting you best-in-class yields from pretty much anywhere.”



Read more: <a href="https://blockworks.co/news/defi-multichain-sommelier-axelar">DeFi Strategies Get a Multichain Boost From Sommelier and Axelar</a>



The non-custodial vaults connect multiple DeFi protocols according to strategies designed by Seven Seas Capital, a team of 5 which spun out of Sommelier early in its development.



Seven Seas not only develops the vaults strategy but independently audits the protocols they select, in an effort to mitigate both financial and smart contract risks for end users, said CEO Sun Raghupathi.



“Arbitrum, from a DeFi economic risk perspective, it&#8217;s a little bit lower than doing things on other [layer-2s] because there&#8217;s more liquidity there,” Raghupathi told Blockworks.



The initial vault only uses ETH and Lido stETH, in <a href="https://blockworks.co/tag/uniswap">Uniswap</a> and <a href="https://blockworks.co/tag/aave">Aave</a>, which Raghupathi calls “as blue chip as you can get.”



“Obviously, there are riskier protocols on Arbitrum,” he said. “We are not touching those yet, but I think there is something to be said about the risk appetite being higher on L2s.”



Seven Seas’ team background is in data science, financial modeling, and smart contract development, and its vaults have appealed to DeFi protocols looking to attract TVL — particularly those specializing in the liquid stating ether and restaking using <a href="https://blockworks.co/tag/eigenlayer">Eigenlayer</a>.



When employing leverage, the team backtests strategies against the prior 6-12 month range of historical volatility and chooses parameters to keep the strategy safe. Through a combination of design and active management, they have successfully avoided losses during tumultuous periods such as the March 2023 <a href="https://blockworks.co/news/circle-usdc-tether-competition">USDC depeg</a> and the July 2023 <a href="https://blockworks.co/news/curve-suffers-exploit">Curve exploit</a>.



“I think it&#8217;s like been extremely validating for Sommelier as a system, because what we&#8217;ve been able to do as strategists is ingest, not just on-chain data, but even things like news events, sentiment from Twitter and stuff like that, and to get out from under these events before they happen,” Raghupathi said.



Manian thinks the infrastructure Sommelier has built is primed to expand the multichain future of Ethereum.



“We have this ability to have vaults that hold positions across multiple chains,” he said. “​​So what this ends up being is, we can now have these Arbitrum cellars, but they could hold positions on Base on Mantle, on kind of anywhere.”



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Sommelier DeFi strategy vaults now live on Arbitrum

Bessie Liu

Sommelier has introduced five new vaults that offer holders of governance tokens an opportunity to earn passive yield ranging from 2% to 4%. Supported tokens include 1inch, ENS, LINK, SNX and UNI.



The strategy itself was designed by data research firms Seven Seas Capital and Define Logic Labs, the team behind <a href="https://blockworks.co/news/sommelier-eth-liquid-staking-vault">Real Yield ETH</a>.



Existing governance tokens in DeFi offer minimal yield opportunities. Lending these tokens out on Aave, for example, will earn holders sub 1% yield. Sommelier’s new vaults are designed to fill that void, Zaki Manian, the company’s co-founder told Blockworks.&nbsp;



These latest vaults are designed to capture the huge arbitrage opportunity in the ETH market, Manian explained.&nbsp;



“There’s a massive amount of ETH sitting idly loaned out on protocols like Aave, and the borrow cost of ETH is around 4%. Meanwhile, yield opportunities on ETH are significantly higher. At a high-level, these gov token vaults capture that arbitrage and convert it into UNI, LINK, ENS, etc. yield,” he said.



When users deposit into these new vaults, their governance tokens are used as collateral to borrow ETH. That ETH is then deposited into Sommelier&#8217;s Real Yield ETH vault, where the assets generate yield through looped leverage and the optimization of tick range liquidity on Uni V3.



“Looped leverage does come with liquidation risk, but the Real Yield ETH vault is equipped to mitigate that risk by constantly monitoring market conditions and adjusting leverage ratios as needed,” he said.



Another important feature that these new vaults offer will be “gas holidays.”



The vault will be holding a simple position when rewards are being harvested, which means that the vault will periodically move into one associated governance token — lowering any gas costs.&nbsp;



“The first window is the first 48 hours after launch, and then depositors will be notified when there are subsequent gas holidays. As with all Sommelier vaults, they’re non-custodial, so you can enter and exit at any time, but this helps people depositing smaller amounts who are more sensitive to high gas fees,” Manian said.



The first 40 addresses to deposit over $1,000 in liquidity in each vault will each be given an additional $25 in rewards. US-based traders will not have access to Sommelier vaults.



Updated June 6, 2023 at 11:01 am ET: Added clarification on vault usage.



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5 New Sommelier Vaults Now Capturing Governance Token Yield

If you start dropping references to &#8220;Ethereum request for comment” in polite conversation, you can expect some blank stares. But sometimes innocuous technical lingo like ERC-20 (tokens) and ERC-721 (NFTs) can become the crypto-equivalent of a household name.



Proponents of the tokenized vault standard ERC-4626 — specifically those in the advocacy group 4626 Alliance which announced an expansion to 11 members Thursday — hope that this little pull request, finalized in March 2022 will find its place in a future ERC hall of fame.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">1/🌟 The 4626 Alliance is thrilled to announce a stellar lineup of new members joining forces to propel the ERC-4626 standard: <a href="https://twitter.com/yearnfi?ref_src=twsrc%5Etfw">@yearnfi</a>, <a href="https://twitter.com/fraxfinance?ref_src=twsrc%5Etfw">@fraxfinance</a>, <a href="https://twitter.com/sommfinance?ref_src=twsrc%5Etfw">@sommfinance</a>, <a href="https://twitter.com/AlchemixFi?ref_src=twsrc%5Etfw">@AlchemixFi</a>, <a href="https://twitter.com/Blockworks_?ref_src=twsrc%5Etfw">@Blockworks_</a>, <a href="https://twitter.com/MorphoLabs?ref_src=twsrc%5Etfw">@MorphoLabs</a>, and <a href="https://twitter.com/joey__santoro?ref_src=twsrc%5Etfw">@joey__santoro</a> <a href="https://t.co/vgTl4fs1Rq">pic.twitter.com/vgTl4fs1Rq</a>&mdash; 4626 Alliance (@erc4626) <a href="https://twitter.com/erc4626/status/1654121022201950208?ref_src=twsrc%5Etfw">May 4, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Disclosure: Blockworks is among the members of the 4626 Alliance.



The standard was first <a href="https://eips.ethereum.org/EIPS/eip-4626">proposed</a> by <a href="https://blockworks.co/tag/fei-protocol">Fei</a> co-founder Joey Santoro in late 2021. Within months, it sparked the <a href="https://twitter.com/joey__santoro/status/1504603906726240258">interest</a> of developer teams from major DeFi protocols such as Balancer, <a href="https://blockworks.co/tag/yearn-finance">Yearn</a> and <a href="https://blockworks.co/tag/frax">Frax</a>.



That prompted Blake Richardson and Vikram Arun, co-founders at Superform, to champion the standard, forming the 4626 Alliance alongside mStable, Balancer and Aztec.



“Our thesis is that 4626 creates the new DeFi summer,” Richardson told Blockworks. He predicts it will be as important as the ERC-20 token standard that led to <a href="https://www.blockworksresearch.com/glossary#initial-coin-offerings-icos">the ICO boom</a>.



<h2 class="wp-block-heading">DeFi’s “ERC-20 moment”</h2>



To date, DeFi has failed to be adequately composable and easy to understand, and has suffered from security risks as a result of a lack of standards, Richardson said. Projects have been forced to author bespoke adapters in order to link up with each other, adding complexity and time to deploy dApps safely.&nbsp;



“Instead of all these isolated groups of people building things that don’t interact with each other, we can build entirely unique composable projects,” Richardson said.



One example is Sommelier — also a member of the 4626 Alliance — which <a href="https://blockworks.co/news/defi-multichain-sommelier-axelar">announced its launch on Arbitrum</a> this week. Co-founder Zaki Manian lamented the standards problem in DeFi, and said that 4626 could speed up his team’s work.



“We’re actually talking to lots of other people in [Ethereum] DeFi about trying to work better [with 4626],” Manian told Blockworks. “If DeFi could collectively all adopt 4626, Sommelier could be everywhere and plug into every protocol in like a few days.”



Yield generating strategies are able to become more complex while also being harder for ne&#8217;er-do-wells to attack. Provisioning audits and ensuring safety has been a major obstacle&nbsp; because each individual protocol implementation has brought its own unique, often complex risks. 4626 — standardizing the tokenized vault — is expected to make the auditors’ job much easier.



But it’s not just about improving speed to market and helping projects become less <a href="https://blockworks.co/tag/hack">hack-prone</a>, the standard also enables new DeFi primitives such as tools for customizable yield exposures, like those developed by Sense Finance, Richardson said.



“Composability is one of the key value props of decentralization in the first place — the whole money Lego pitch for DeFi is one of it’s most critical for adoption,” according to Richardson, who thinks the types of applications that will be built using the standard, is set to rise dramatically.



For instance, <a href="https://blockworks.co/news/gearbox-is-releasing-v3">Gearbox uses 4626</a> to let levered yield strategies be included seamlessly into existing strategy vaults, such as those planned by Yearn Finance in its upcoming V3.



Increasing adoption within DeFi is the primary goal of the alliance, and once met, members will decide on the next steps, such as raising awareness of its benefits to the public.



“Most investors aren’t particularly standard conscious — if they buy an NFT with 1155 versus 721 it’s not changing their perspective a ton,” Richardson said. “However, I think the compound benefit of standardization will lead more people to adopt DeFi because they can start to trust it more.”



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Tokenized Vault Standard on Ethereum Set to ‘Kick Off New DeFi Summer’

In the culinary world, a sommelier is a trained and knowledgeable professional, adept in food and wine pairing. In the <a href="https://www.blockworksresearch.com/glossary#inter-blockchain-communication-protocol-ibc" target="_blank" rel="noreferrer noopener">interchain</a> landscape, asset management protocol <a href="https://blockworks.co/tag/sommelier" target="_blank" rel="noreferrer noopener">Sommelier</a> mixes and matches DeFi yield opportunities selected by independent strategists.



The Cosmos-based chain launched its first “intelligent DeFi vaults” on Ethereum mainnet in January, and has since grown its total value locked (TVL) from about $1.4 million to $16.7 million.&nbsp;



Now, thanks to Axelar’s implementation of general message passing (GMP), Sommelier is expanding to additional EVM-compatible chains, starting with layer-2 rollup, Arbitrum One.



Sommelier took two years to build, co-founder Zaki Manian told Blockworks in an interview. But with the advent of <a href="https://blockworks.co/tag/axelar" target="_blank" rel="noreferrer noopener">Axelar</a>, if they were starting from scratch today, it could be done in 60 days, Manian said.



“The combination of the two is immensely powerful,” Manian said. “What Axelar has done is establish a transport system.” It brings the same level of composability as found natively in the Cosmos tech stack to other EVM-based <a href="https://blockworks.co/tag/layer-1" target="_blank" rel="noreferrer noopener">layer-1</a> chains and <a href="https://blockworks.co/tag/rollups" target="_blank" rel="noreferrer noopener">rollups</a>.



Axelar’s GMP for Cosmos recently went live on mainnet, and this will be its first production use once Sommelier&#8217;s Arbitrum vault launches.



“I think the [layer-1] war is going to start coming to an end soon,” said Manian. When decentralized application layers all fit together, “we’re gonna build amazing user experiences that are really able to onboard at a mass scale,” he said.



For instance, the protocol&#8217;s two main vault strategies — Real Yield USD and Real Yield ETH, which account for 97% of its TVL — couldn’t exist without the mechanisms of the Cosmos SDK. Non-custodial depositors on Ethereum mainnet are able to deploy capital into vaults managed by Sommelier’s strategists, approved by holders of its native token SOMM on its Cosmos chain.



But Ethereum mainnet — due to gas costs and performance constraints — lacks financial primitives, such as derivatives, that are enabled by other chains, including Arbitrum. The Axelar tie-up gives strategies access to Arbitrum dapps, while offloading the cross-chain infrastructure requirements to Axelar’s validators.



“Everything you can build with the Cosmos SDK is now going to be a lot more interoperable with Ethereum and other layer-1s that have EVM-support,” Axelar’s co-founder and engineering lead Sergey Gorbunov told Blockworks.



Previously, Sommelier would have had to run nodes, not only on Ethereum, but on any additional chains where it wants to offer its vaults. But now Axelar becomes a single point of contact for its future expansion.



“The Axelar network has been designed to support that type of activity on the economic side, on the incentive side,” Gorbunov said.



<h2 class="wp-block-heading">What are the risks?</h2>



Sommelier vaults on Arbitrum naturally will introduce some new trust assumptions and commensurate risks.



As before, users of its DeFi strategies have to trust SOMM validators to behave correctly, but now must trust the design of Axelar’s GMP and its validators as well. However, Manian said, “we have designed our smart contracts on Sommelier to make it so it would be difficult for validators to steal funds, even if Sommelier or Axelar is compromised.



There are also inherent risks of transacting on EVM alternatives, such as Arbitrum, including the need to trust its centralized sequencer. These scaling solutions are still comparatively new, and there could be flaws or bugs yet to be revealed, Manian said.



“There is a reason why 95% of the Defi TVL is on Ethereum, but there’s so many exciting applications being built on L-2s like derivatives that are very exciting for strategies that it’s impossible for us to ignore the possibilities,” he said.



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DeFi Strategies Get a Multichain Boost From Sommelier and Axelar

DeFi protocol Sommelier announced the launch of a new ETH liquid staking token vault called Real Yield ETH on Wednesday.



Real Yield ETH is the brainchild of strategy provider Seven Seas Capital and Web3 data analytics firm DeFine Logic Labs.



The vault is designed to generate yields on liquid staking tokens including rETH, stETH and cbETH through two primary techniques: leveraged staking on Aave and Compound, and providing liquidity on Uniswap V3. The protocol is expected to make more tokens available on Real Yield ETH in the future.



“The original foundational idea behind real yield ETH was having an index of the best yield on ETH,” Stephen Henkel, the CEO of Define Logic Labs, told Blockworks.



Existing index tokens peg their holders to the validation yield and are dependent on how much commission validators or the protocols are taking, Henkel said.



In the case of Real Yield ETH, which is considered a yield-weighted index, the more yield a particular strategy can receive, the more it will take from that index.



“As a strategy reaches its soft cap of TVL, the incoming TVL can go into other strategies, so it is continuously weighed in such a way that it can take in more and more TVL,” Henkel said.



Although Real Yield ETH is built on top of Sommelier — which is part of the Cosmos IBC, it is an ERC-4626 vault and will live on the Ethereum blockchain.



Sommelier helps these unique strategies come to life as the technology enables “Uniswap V3 tick optimization, really tight leverage loops and taking multiple positions across multiple assets and protocols,” Sun Raghupathi, the co-founder and CEO of Seven Seas, told Blockworks.



<a href="https://www.blockworksresearch.com/">Blockworks Research</a> Analyst David Rodriguez notes that “Sommelier&#8217;s strategy of leveraging an app-chain to optimize the Ethereum DeFi experience that offers non-custodial, institutional-grade mid-frequency strategies that change with on-chain market conditions is a 0 to 1 improvement on yield aggregation protocols like Yearn Finance.”



“Based on (unofficial) backtested models, RealYieldETH should be able to scale to over $60M TVL while providing ~13%+ APY without liquidity incentives,” Rodriguez said. “This is &gt;2x yield than the next competing ETH-based yield opportunity offered by Frax&#8217;s sfrxETH product.”



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Sommelier Launches New ETH Liquid Staking Token Vault

DeFi portfolio management software Sommelier — bucking a trend of institutional yield-farming adaptation — is betting on a couple of new automated trading strategies catering to mom-and-pop retail traders.



The twin products are designed for ether (ETH) and bitcoin (BTC) holders. They’re accessible via the purchase of two so-called strategy tokens, Sommelier’s ETHBTCTrend and ETHBTCMom.&nbsp;



The ETHBTCTrend portfolio follows price and volume trends of bitcoin and ether and adjusts holdings accordingly. The momentum portfolio, ETHBTCMom, reacts to price appreciation of either asset.



By definition, strategy tokens expose investors to trading plays without the backend prerequisite heavy lifting. Investors only need to purchase tokens, then sell shares to exit — so there are no lockup periods or liquidity constraints at play.&nbsp;



<h2 class="wp-block-heading">A non-custodial token </h2>



The trading strategies for the two newly launched tokens will be provided by ClearGate, a financial firm that has previously worked on quantitative trading in TradFi.



Users are currently only able to acquire ETHBTCTrend and ETHBTCMom on Uniswap V3 on Ethereum and Polygon. But Sommelier co-founder Zaki Manian has plans to make the tokens available on additional decentralized exchanges (DEXs) soon.



Despite some minor similarities, purchased strategy tokens — unlike options, swaps and mutual funds — fall under the purview of smart contracts, ensuring the provider cannot take custody of the cryptocurrency. 



Sommelier is set to act as a liaison between the strategy providers, running machine-learning algorithms off-chain on Ethereum. The algorithms power the smart contracts that govern custody.&nbsp;



Validators on Sommelier are tasked with taking trading instructions from providers and implementing on Ethereum accordingly — meaning ClearGate won’t actually control user assets — making the strategies non-custodial.&nbsp;



<h2 class="wp-block-heading">Strategy tokens are designed for wider investor adoption</h2>



Aave on Ethereum has roughly <a href="https://dune.com/queries/595247/1111728" target="_blank" rel="noreferrer noopener">500 daily active users</a> — a fraction of major DEX players, including Uniswap V3, which facilitates transactions for some <a href="https://dune.com/queries/515812/973511" target="_blank" rel="noreferrer noopener">10,000 active users</a> each day. 



According to Manian, it is likely that people continue to engage with DEXs because they don’t understand the complicated processes of placing money in a lending protocol or other DeFi structures.



“But they do have an idea of holding a token,” he said.



Added Manian: “So, the core of what we’re trying to do is to create a token that is a better long term way of holding bitcoin and ether than buying a spot and holding it on an exchange,” Manian said. “ We think that the brain power that we’re bringing to the market through strategies [is] enhancing that.”



Over the long term, Manian is vying for Sommelier to become a “supermarket” for strategy tokens.



“We’re trying to get to a world where if you want exposure to an asset, you won’t have to sit there and watch your computer, adjust limit orders and think about prices and all that stuff,” he said. “You can just buy a strategy token,” he said.



But the process of launching a strategy token hasn’t been simple, Manian said. In part, that’s due to the typical retail investor’s understanding of complex — often esoteric — DeFi concepts are lacking.&nbsp;



“Tokens and staking are probably the two concepts that we have got to significant mass consumption, every other concept in crypto, I think, is still somewhat niche,” Manian said.



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Strategy Tokens Could Simplify Trading for Mom and Pop Investors

Jacquelyn Melinek

<div id="highlights-block_61702f078ccbe" class="highlights">
 <ul>
 <li>Staking Facilities has staked over $2.2 billion in assets and paid out $100 million in rewards</li>
 <li>Sommelier’s software aims to stitch together multiple ecosystems so that users have an easier, more understandable experience, Zampolin said. </li>
 </ul>
 
</div>



Munich-based Staking Facilities has bootstrapped a $25 million investment for a venture capital arm, Louis Bauer, a business developer at Staking Facilities, told Blockworks.&nbsp;



The company is a validator, node operator and service provider for infrastructure and has invested in a handful of protocols like Solana, Cosmos, Polkadot and Dfinity.&nbsp;



In total, Staking Facilities has staked over $2.2 billion in assets and paid out $100 million in rewards, according to its <a href="https://stakingfacilities.com/">website</a>. 



<div class="wp-block-image"><figure class="aligncenter size-full"><img loading="lazy" decoding="async" width="512" height="341" src="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Staking-Facilities-team.jpeg" alt="Staking facilities" class="wp-image-9630" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Staking-Facilities-team.jpeg?w=512 512w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Staking-Facilities-team.jpeg?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Staking-Facilities-team.jpeg?w=386 386w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Staking-Facilities-team.jpeg?w=392 392w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Staking-Facilities-team.jpeg?w=329 329w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Staking-Facilities-team.jpeg?w=80 80w" sizes="auto, (max-width: 512px) 100vw, 512px" /><figcaption>The Staking Facilities team: Source: Staking Facilities</figcaption></figure></div>



The funds will be used to finance early stage teams. The company already started investing in the past few years for protocols in a lot of layer-1 blockchains, but it&#8217;s interested in getting into the DeFi and middleware section of protocols, Bauer said.&nbsp;



“We would like to support developer teams in earlier stages than we have before. We have been investing in a lot of protocols that are already established,” Bauer said. “One of the most interesting parts is that we will be able to support teams in the seed stage that are building an initial developer team,” he said.&nbsp;



<h3 class="wp-block-heading">DeFi portfolio management Sommelier raises $23M&nbsp;</h3>



In separate news, Sommelier, a decentralized portfolio manager software, has raised $23 million in a Series A funding round led by Polychain Capital.&nbsp;



Alameda Ventures joins as an existing investor alongside new participation from Zola Ventures, Byzantine Ventures, Tendermint Ventures, Secure Ventures, D1 Ventures, and Ferngrove Ventures, the company said. In total, Sommelier has raised about $27 million, Co-Founder Jack Zampolin told Blockworks.&nbsp;



The company is a complex protocol that is Ethereum-based, but will soon be managed on the Cosmos blockchain. The funding round comes at a time when the company’s network starts its mainnet, which is powered by a decentralized network of blockchain validators.&nbsp;



Sommelier’s software aims to stitch together multiple ecosystems so that users have an easier, more understandable experience, Zampolin said.&nbsp;



“I think in traditional finance, when you look at actors like prime brokerages and large investment banks, they’re doing this work, wrapping more financial products to be more passive investment vehicles,” Zampolin said. “Sommelier is an effort to do that in DeFi, but instead of providing that service to high profile individuals and very large institutions, we’re providing it to anyone with an account on one of these exchanges,” he said.&nbsp;



In the first six months since the launch of its “Pairings Uniswap v3 liquidity manager application” Sommelier’s product helped liquidity providers place over $10 million in liquidity on Uniswap V3, which generated over $2 million in fees for portfolio owners, it said.&nbsp;



In the near future, the Sommelier community will vote on its community-governed Cellars, which are programs that can fully automate liquidity management through its blockchain and can expand and improve its blockchain software as well as its ecosystem and community of LPs, it said.



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