# Introduction

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LemmaSwap is a new type of decentralized exchange (DEX) protocol that allows traders to execute spot swaps using an underlying perpetual futures exchange's liquidity. 
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## Why use LemmaSwap?

* For traders:
  * Deeper liquidity when executing spot swaps
* For liquidity providers:
  * Highly composable ERC20 assets
  * No impermanent loss
  * Yield generation via spot trading fees and funding rate PnL

## How does it work at a high level?

LemmaSwap holds assets such as ETH, BTC, USDC etc. on its balance sheet and acts as a counterparty to every trade while simultaneously hedging to keep its portfolio delta equal to one.

Liquidity providers can contribute to the assets on the LemmaSwap balance sheet in two ways: 

<figure><img src="https://2299409159-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2FTKflmlnoQTxv99SMPsfK%2Fuploads%2FwE8leZoLkgQC1XPPFvob%2FFrame%2011027.jpg?alt=media&#x26;token=54159ad4-1932-477d-b9f6-fc91a1acf04f" alt=""><figcaption><p>USDL backed by hETH, hBTC and USDC</p></figcaption></figure>

* By minting USDL  —  the LemmaSwap stablecoin, which is backed by pools of hedged assets (eg. hETH below is ETH + a short ETH position)<br>
* By minting synthetic tokens, which are backed by a mix of spot assets and 1x long perpetual futures positions (eg. ETH\*, a LemmaSwap synthetic asset can be backed by spot ETH and/or a long ETH perp)

<figure><img src="https://2299409159-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2FTKflmlnoQTxv99SMPsfK%2Fuploads%2FKZPtRJbCAblhshaBSBf8%2FFrame%2011028.jpg?alt=media&#x26;token=c77efb6b-a607-4248-a7ec-be3552fdeee4" alt=""><figcaption><p>ETH* backed by spot ETH and/or a 1x ETH long</p></figcaption></figure>

Now let’s say a user wants to swap ETH for BTC, and LemmaSwap has USDL and synthetic BTC (BTC\*) as liquidity on its balance sheet. This liquidity is used to execute swaps in two simple steps:

* The user deposits ETH and LemmaSwap hedges it by increasing its short ETH position by the same amount deposited
* LemmaSwap increases its long BTC position by the same USD amount of ETH deposited and sends back to the user the freed up BTC collateral

<figure><img src="https://2299409159-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2FTKflmlnoQTxv99SMPsfK%2Fuploads%2Fhi5d4pOcrn8tjYkoZwh2%2Fbt.png?alt=media&#x26;token=38a0b9ec-848e-4d96-bbed-4bd0f65c473c" alt=""><figcaption><p>Swapping ETH for BTC</p></figcaption></figure>

At all times, USDL is backed 1:1 with USDC or a ETH delta neutral position, and BTC\* is backed 1:1 with a BTC spot or a 1x long BTC position.


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