Introduction

Sommelier is a Cosmos appchain offering automated strategies for passive investors on Ethereum. Users can pick yield or trading strategies to put their funds into, and Sommelier does the rest.

Built by some of the most respected minds in Cosmos, Sommelier is making automated investing more secure and accessible for users on any chain. It has over $18 million in TVL and 10 different strategies live, with a brand new Real Yield ETH strategy that just launched yesterday.

https://twitter.com/sommfinance/status/1646595028184190987?s=20

The Problem

Yield farming and trading can be tedious and costly for the average user. Whether it be constantly having to monitor yields/price action, high gas fees, or just a lack of expertise, most users would benefit from a tool that automates these processes for them.

“First generation” yield protocols only offer static strategies (e.g. simple auto-compounder vaults). Users save on gas and time, but these basic strategies cannot adjust to changing market conditions and consequently become outdated over time.

This led to the creation of dynamic yield strategies that can respond to new market conditions, Yearn Finance being a popular example of something that offers this. However, repositioning vault funds is often done at the will of a single person or multisig, so depositors are left with a new vulnerability. Strategies can also get costly on chains like Ethereum, especially when constantly moving funds around.

The Goal

Sommelier is the ideal yield protocol for Ethereum and beyond. It uses its Cosmos appchain to offer dynamic strategies that are fully decentralized with none of the infamous management risk seen with other protocols. Strategists can only move funds with the approval of Sommelier validators, and funds are managed remotely using cross-chain messages sent from Sommelier.

Users never send funds to Sommelier, they always stay on the same chain as their strategy. Anyone can create farming or trading strategies on any chain that Sommelier supports, starting with Ethereum. Acting as a “co-processor to Ethereum”, Sommelier reduces strategy costs by offloading computation from the main chain and bundling transactions together as one. It is the ultimate yield protocol.

How Does it Work?

The Sommelier network is built with the Cosmos SDK, a toolkit for building custom appchains that run on the Tendermint consensus engine. Appchains are layer 1 blockchains with infrastructure specifically designed for some application. Simply put, developers can customize network-level features to meet their application’s needs. In Sommelier’s case, the chain is a governance layer for asset management on other chains.

Strategies exist on the chain they’re being executed on, not on Sommelier, so users never bridge and always keep the security of their native chain.

There are two types of automated strategies on Sommelier: yield and portfolio. Yield strategies simply automate earning yield on some asset(s). For example, the Real Yield USD strategy accepts stablecoin deposits and earns yield between lending on Aave, lending on Compound, and LPing on Uniswap.

Portfolio strategies are a little more fun. These are automated trading strategies that make crypto investing way more accessible for the average person, since users can hold their assets without stressing about how to trade them. Strategies can even be tokenized as Sommelier Strategy Tokens, so users can enter and exit a strategy by simply buying and selling a token.

There are different kinds of Portfolio strategies too. “Trend” strategies rebalance assets based on longer term price action, while “Momentum” strategies rebalance assets based on short term momentum. “Steady” strategies sell on breakouts and set trailing stops/rebuy during breakdowns. Users can view all the data of their strategy including its performance, backtesting, current allocation, Strategy Provider, and how much of the yield they’ll earn.

Anyone can write a strategy smart contract (a.k.a vault) and deploy it on any chain that Sommelier supports. After it’s deployed and the creator can show good backtesting results, they submit a governance proposal requesting their strategy be added to Sommelier. If approved by governance, the strategy is added to Sommelier and users can deposit to earn yield.

Creators, also known as Sommelier Strategy Providers (SPs), get paid for their work. For each new strategy, governance approves a flat “platform fee” and a variable “performance fee” paid by depositors. The performance fee fluctuates depending on how well a strategy performs, while the platform fee never changes. Both of these fees are split between the SP and the protocol. Each strategy has its own fees and fee split.

SPs decide on how to allocate a strategy’s funds, when to move funds for better yield, or how to trade certain price action. They also collaborate with the Data Science Team to get the most accurate market info at any given time. In the future, regular users will even be able to send ideas to SPs through the “Cellar Portal”, where SPs can share their fees with people making useful suggestions.

SPs don’t make decisions freely, but instead send “recommendations” to Sommelier Validators. Validators run a set of checks and collectively vote on every decision before it’s executed, so SPs can “recommend” that all the funds are transferred to their wallet, but validators won’t approve this.

This leaves funds protected by Sommelier’s PoS consensus, even though strategies themselves are managed by SPs. Once validators approve a decision, they send it as a cross-chain message sent to Ethereum via the Gravity Bridge. This lets strategies stay scalable and efficient without compromising decentralization.

https://twitter.com/sevenseas_c/status/1640751841800605699?s=20

Sommelier scales unlike any other protocol, reducing gas costs and multiplying efficiency. SPs can use machine learning algorithms and other offchain market signals to power strategies. Offchain calculations can be used to make advanced strategy decisions, such as auto-adjusting Uni v3 tick ranges for LPs.

In short, offchain data = complex new strategies with low costs. Sommelier strategies can leverage the exact same models used in CeFi for trading and automation.

On top of this, Sommelier validators bundle cross-chain messages into single transactions (like rollups do) which further reduces gas costs. SPs can also take advantage of Sommelier’s auto-signature management, which automates trading or other common strategy moves without SPs having to sign every transaction.

https://twitter.com/sommfinance/status/1620715336495407108?s=20

So, Sommelier is basically a decentralization layer for asset management. It offers the first dynamic strategies that do not rely on some unchecked centralized entity, but instead rely on Sommelier PoS consensus. Data scientists, SPs, and non-SPs can easily collaborate to execute on “alpha” and get rewarded. None of this exists on other protocols.

With this novel architecture, Sommelier can become the go-to solution for treasury management. Protocols often compromise between a trusted setup for quick decisions, or DAO-approved decisions which are slow and inefficient. On Sommelier, protocols don’t have to compromise anymore. They can use any setup for asset management and get the supervision of Sommelier validators, whether it be their own strategists or official Sommelier SPs.

Partnerships

Sommelier currently only supports Ethereum-based strategies, but is planning to expand to Arbitrum and other EVM chains starting very soon. Zaki also mentions they’ve considered building natively for Cosmos, but Sommelier’s current focus is finding a market fit in the broader EVM ecosystem.

Sommelier is partnered with Demex to offer lending and borrowing of the Real Yield USD tokenized vault share. Demex is an orderbook exchange built on the Carbon L2 with its own money market called “Nitron”. Sommelier depositors can earn extra yield by lending on Nitron and use their YIELDUSD token as collateral to borrow other assets. Rhino.fi, a multi-chain yield aggregator, also just recently added Sommelier strategies to their frontend.

Tokenomics

$SOMM Price: $0.17

Circulating Supply: 194,088,587

Total Supply: 500,000,000

Market Capitalization: $34,394,241

Fully Diluted Valuation: $88,604,490

Learn more about token distribution here.

The $SOMM token is used to pay all transaction fees on the network like sending cross-chain messages or staking and claiming the rewards. Validators stake $SOMM to run a node and have their $SOMM slashed for acting maliciously.

Users can stake their $SOMM with validators (delegate) to earn staking rewards. Not only are $SOMM stakers earning $SOMM rewards and network fees, but also a portion of all yield earned in Sommelier strategies. The more TVL Sommelier vaults accrue, the more yield $SOMM stakers get.

$SOMM stakers can participate in governance and vote on protocol updates, adding/removing new strategies and SPs, and approving spending proposals.

Some strategies may incentivize depositors with $SOMM rewards. Strategy creators can apply for $SOMM grants through governance. All $SOMM rewards and creator payments are non-inflationary as they come from the Community Pool; the total supply is fixed at 500 million.

Conclusion

For protocols and users alike, Sommelier is an exciting new option for asset management on any chain. There is no longer a compromise between decentralization and efficiency when it comes to dynamic strategies, Sommelier users get both. This is the power of the Cosmos appchain.

As DeFi continues to grow, the demand for passive investing tools will only grow with it, and Sommelier is well-positioned to meet this demand with its novel solution for automation.

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DISCLOSURE: I hold a small amount of $SOMM (<1% of my portfolio). I was not asked to write this article and have not been compensated in any way. The information provided in this article is solely for educational purposes and should not be considered as financial advice. The views expressed in this article are my own and do not necessarily reflect the official policy or position of any company or organization. Readers should always conduct their own research before making any financial decisions.