Understanding Hermes Protocol
A short guide to understand the basics of becoming a liquidity provider on Hermes.
Getting started with Hermes isn’t easy, there is a lot to grasp and the unique UI can be a lot to take in. This small guide is intended for Hermes beginners with an understanding of DeFi and Crypto. It tries to answer recurring questions about how to get started with Hermes and how it works or makes money for liquidity providers.
The easiest way to understand Hermes is to see it as an exchange. Its main goal is to let users and other decentralized protocols exchange both volatile assets (DAI to WETH for example) and stablecoins (DAI to USDC for example) through it with low fees and low slippage. Unlike exchanges out there that match a buyer and a seller, the behavior of Hermes is different, it uses liquidity pools like Uniswap. To achieve this, Hermes needs liquidity (tokens) which is rewarded by those who provide it.
Hermes is non-custodial meaning the Hermes developers do not have access to your tokens.
We aimed to address the original protocol's different shortcomings without compromising AC's vision of the fee incentives model, in order to achieve this we had to temporarily compromise and include a DAO, making the process of whitelisting tokens permissioned, we have plans laid out on how to change this in the future achieving a fully decentralized and permissionless process of whitelisting new tokens for gauge creation.
Additionally, a one week vote lock was created to address the bribe farming exploit present on the original protocol which fundamentally broke the game theory of the fee incentive model.
If you are new to Ethereum, Metis or DeFi, liquidity pools are a seemingly complicated concept to understand so I will do my best to help.
Liquidity pools are pools of tokens that sit in smart contracts. If you were to create a pool of DAI and USDC where 1 DAI = 1 USDC. You would have the same amount of tokens, let’s say 1,000 tokens (1,000 DAI and 1,000 USDC) in the pool.
If trader 1 comes and exchange 100 DAI for 100 USDC, you would then have 1,100 DAI and 900 USDC in the pool so the price would tilt slightly lower for USDC to encourage another trader to exchange USDC for DAI and average the pool back.
You can see those details for each pool and it is something you can take advantage of when depositing.
Stable coins have become an inherent part of cryptocurrency for a long time but they now come in many different flavors (DAI, TUSD, MIM, BUSD, USDC and so on) which means there is a much bigger need for crypto users to move from a stable coin to another. Centralized exchanges tend to have high fees which are problematic for those trying to move from a stable coin to another. As a result, Hermes Protocol has become the best place to exchange stable coins because of its low fees and low slippage. And Hermes also allows swaps with volatile assets.
Every time someone makes a trade on Hermes Protocol, liquidity providers (people who have deposited funds onto Hermes Protocol) get HERMES from emissions and fees instead go to HERMES stakers that voted for that pool, this is why you will see high APRs on pools with high volume.
So if you’re wondering where those returns come from, the short answer is trading fees and emissions.
Arbitrage is the simultaneous buying and selling of, in our case, a token to make a profit. Because cryptocurrency markets can often lack liquidity, there are often opportunities for traders to take advantage of price discrepancies to make a profit which can be helped by protocols like Hermes.
Liquidity pools (particularly one without an opportunity cost) are a great way to help stable coins keep their pegs. It makes easy for traders to arb (see question above) when the price slips off the peg which is very important for all the companies and foundations developing stable coins as having a $0.98 stable coin is never a good look.
As a result, pools on Hermes can be “incentivized”. That means that on top of emissions, companies can give rewards to people providing liquidity to the pools with their coins.
Currently there aren't any incentivized pool.
HERMES token is a governance and utility token for Hermes that has recently released. All those who have participated in the Hermes pools will retroactively receive HERMES tokens.
Hermes Contracts are not audited, but Hermes is a Solidly fork and Solidly has been audited. However to address Solidly's shortcomings, we have made some changes to the contract, votes are locked for 1 week and whitelisting tokens is done via a DAO.
Security audits don’t eliminate risks completely so it’s still possible a vulnerability be found in Hermes smart contracts. High returns never come without risks.
On top of the hermes smart contracts themselves, whenever you join a pool, you’re also accepting systemic risks from the coins in the pool. For example, if you do not want to have exposure to USDT, then you cannot join a pool that has it.
On top of its audit, Hermes pools have now held several millions and Solidly's pools held billions, it goes without saying that hackers would have already unsuccessfully tried numerous times to steal those funds.
Swap fees are fixed and are 0.01%, lowest in Metis Andromeda, it is thought to be the most efficient when exchanging stable coins.
There are no fees for deposits and withdrawals.