Archimedes Finance Whitepaper
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Archimedes Finance Whitepaper1. Liquidity and Current Challenges1.1. Not everything is so great1.2. Challenges for Big Players1.3 Challenges for DeFi native (smaller and more active) players1.4 Challenges for Projects2. The key for sustainability is using idle liquidity2.1. What are we doing about that?2.2. Longer term - leverage brokers and bribes2.3. Tapping into the largest sources of idle liquidity3. The Mechanics & Examples3.1. “The lenders”: Curve liquidity provider (LP) aka “Bob”3.2. “The borrower”: Leverage takers (LT) aka “Alice”4. FAQ4.1. Alice here, I want to take leverage…4.2. Bob here, I am a liquidity provider. A few questions…
1. Liquidity and Current Challenges
Liquidity is the oxygen of every financial system. DeFi is no different, and stablecoins are the red blood cells of DeFi.
There are different generations of stablecoins:
- First generation: moves liquidity from the real world to on-chain, or between blockchains. Examples: USDT and WBTC.
- Second generation: “unlocks" some of the liquidity a HODLer has. For instance, you can borrow DAI against your ETH - so you keep the ETH upside and free-up some liquidity to keep investing (or aping).
- 3..N generations offer all kinds of new and exciting financial engineering. Examples: alUSD, MIM etc….
Nth generation stablecoins are useful only if you can trade them for 1st gen stablecoins (Like: USDC, USDT). There must be a market for all these stablecoins. Curve is the primary stablecoin market on Ethereum. If your stablecoin isn’t on Curve, you don’t have liquidity.
We use Curve as the prime example, but of course there are other markets (like: Uniswap) and more blockchains out there.
1.1. Not everything is so great
Curve (like many other AMMs) has one major issue: Idle liquidity.
The vast majority of the liquidity on Curve sits idle, collecting high APY only from CRV token emissions. The number of investors and projects fighting over the bonus CRV token is increasing, sending bonus yields downwards.
Has the bonus token party ended? Not yet, but a sustainability crisis is looming.
1.2. Challenges for Big Players
Imagine you are running a $30B DeFi investment fund. What do you care about?
The obvious: risk/return balance
- Low risk (relative to DeFi)
- Not-too-low and stable APY: Comparing market conditions. APY needs to be higher than what you can make on AAVE lending APY. Doesn’t have to be at the top 1% of the market though. You’re happy with being in the top 40% of all Curve pools APY.
- Passive (-ish): If all the above exist. This is a set-and-forget instrument.
The less obvious: Investment that can absorb large sums without breaking.
With a $30B fund, you are not going to do a lot of $1M investments. You like Curve, but fixed CRV emission caps the amount everyone can invest in total. It happens because CRV drives 95%+ of Curve APY. If you invest “too much” (even across different Curve pools), you are going to drive APY down.
Your options today are:
- Get more speculative. Go long or short on different tokens
- Park your fund in a lending market (like AAVE) for around 2% APY
- Get out of DeFi - you can get around 3% in the traditional world with a lower (or different) risk profile
1.3 Challenges for DeFi native (smaller and more active) players
If you are not a whale, you are not worried about breaking the instrument you invest in.
- Ultra high APY and stable APY: Position is always at the top 10% of the market.
- Low risk (relative to DeFi)
- Set-and-forget: No need to deal with managing position, harvesting or gas fees
- No locking, always liquid
Your options today are:
- Go to Convex and change pools every week or so
- Use a cross pool managed stablecoin strategy (a.k.a. “meta-vault*” - see below) like OUSD, and settle for a lower APY
- Ape somewhere else…
- What are meta-vaults?
They are a specific type of asset:
- Appreciating assets (like: Yearn vault)
- Liquid and not tied to a single Curve pool. They can move between AMMs, pools, chains and protocols (unlike most Yearn vaults)
- Fully collateralized meta-vaults (like: OUSD)
- The Meta-vault’s project team is activly selecting top-tier highest-quality projects to include. The focus is on quality not quantity
1.4 Challenges for Projects
Projects are looking for liquidity that is both stable and sustainable. Most liquidity is mercenary liquidity. This forces projects to take part in the “Curve Wars” and offer “bribes” for liquidity. Curve is getting more crowded, competition is fierce, and bribes are not sustainable long term.
2. The key for sustainability is using idle liquidity
CRV emissions cap APY.
CRV emissions determine how much idle liquidity Curve can hold. It limits how many projects and investors it can support. There is one way to make Curve more sustainable and help it scale. We need to generate yield by putting idle liquidity to work. This is true cross chain and for other AMMs also.
A straightforward way to “use idle liquidity” is to borrow it.
Lenders want good ROI and acceptable risk. Borrowers accept more risk for higher APY. One way to do it is leverage. Leverage is a powerful tool, but as history has shown us, widespread indiscriminate leverage can be dangerous.
Leverage must be done right.
There are some projects built around leveraging Curve liquidity. They are all great experiments and we have learned a lot from them. Unfortunately, they are focused more on “aping” than on long term sustainability.
2.1. What are we doing about that?
Archimedes is building a lending/borrowing market (like: AAVE) on top of any AMM. In essence our vision is to: Unify all idle liquidity across all AMMs and chains.
Let’s start with the lending side.
Archimedes creates a few Curve pools (3CRV/lvUSD, ETH/lvETH, sBTC/lvBTC). This is how we attract lenders. We attract liquidity to these pools by offering a high native APY.
The key is that our APY is not coming from CRV emissions.
Archimedes put this money to work, which creates a “native” APY. That begs two questions:
- How is it more sustainable?
- How do you generate APY?
Sustainability & Native APY
As of today, Curve has around $10B of liquidity and around $200M of trade volume. Meaning 99% of liquidity is idle. So, current CRV emissions and price put an upper limit on Curve.
Archimedes' Curve pools APY are coming from “native” activity of the liquidity. They aren't capped by CRV emissions. That allows Curve to scale.
- Non-Archimedes pools still get enough liquidity to thrive.
- CRV emission is a supporting buffer. It improves security and provides head room for all protocols.
- CRV emission can support a certain amount of idle liquidity (depends on CRV price and number of protocol participants). The rest of the liquidity is going to Archimedes pool (3CRV/lvUSD for example). Archimedes then lends this liquidity and pays interest to Archimedes pools’ liquidity providers.
We lend this idle liquidity to investors to take leverage on assets.
These investors provide collateral. Then, we create leveraged positions on a meta-vault like OUSD. Our 3CRV/lvUSD Curve pool leverages only meta-vaults that are pegged to the USD (and our sBTC/lvBTC for BTC pegged meta-vaults, etc...)
We pay 3CRV/lvUSD LPs with ARCH, stablecoins, meta-vault protocols governance tokens and ETH - here is how:
- 3CRV/lvUSD LPs get some of their APY with ARCH token
- Users bid on their leverage allocation. They bid by buying and burning ARCH tokens (more on that later)
- The user created a position and enjoys high APY. Other investors are waiting to borrow this liquidity to get APY also. So the user requires to burn more ARCH to sustain his high APY. You can view it as an on-going interest payment on a loan
- 3CRV/lvUSD LPs get some of their APY with meta-vault stablecoins (like: OUSD)
- We take origination fees when lending lvUSD. The user taking the leverage is paying the origination fee. Archimedes shares fees with ARCH holders and liquidity providers which in turn provides a high native APY.
- Leveraged position generates yield (OUSD yield in the example above). We are sharing some of this yield with liquidity providers, by incentivizing our Curve pool with meta-vault stablecoin (like: OUSD).
- 3CRV/lvUSD LPs get some of their APY with ETH
- We wrap the leveraged position with an NFT. It makes it easier to trade the position (without unwinding it). NFT sales might incur secondary royalties that might go to the LPs as ETH.
- 3CRV/lvUSD LPs get some of their APY with protocols governance token
- Meta-vault projects (like: Origin Dollar) will incentivise our pools with their own governance tokens (like: OGN) that we can provide more leverage and sticky liquidity to their protocols
- Archimedes is a sustainable lending/borrowing market that pays interest natively.
- Interest is coming from real activity and not from CRV emissions.
- On top of that, Meta-vault protocols are going to bribe and provide liquidity because we offer them a sticky TVL
- We wrap the position with an NFT. It makes it more tradable (without unwinding the position), and mitigates Curve as a single point of failure. It also provides potential for additional revenue streams
2.2. Longer term - leverage brokers and bribes
We see two longer term plays
- “Leverage brokers”: Brokers buy ARCH tokens from liquidity providers, but not for taking leverage. They use the ARCH to buy access to leverage and sell it at a later time for a premium.
- How to decide which project gets new leverage allocation? We are planning to let the ARCH token holders decide via vlArch voting (TBD). We expect projects to bribe ARCH holders to get the next lvUSD allocation.
2.3. Tapping into the largest sources of idle liquidity
Curve is one of the largest but not the only AMM with idle liquidity. The same mechanism can support other AMMs and other blockchains.
We will expand to where the largest amount of idle liquidity is.
3. The Mechanics & Examples
Let’s introduce the main players: Bob the liquidity provider (LP) and Alice the leverage taker (LT).
3.1. “The lenders”: Curve liquidity provider (LP) aka “Bob”
Bob is what we call a “big player” (see above)
Bob doesn't want to focus on a single asset or active management of the position. He also runs a big portfolio and cannot do small investments. So he’s looking for an investment that can absorb large amounts of liquidity.
Bob provides liquidity to Archimedes 3CRV/lvUSD Curve pool. This pool provides decent and stable APY with a lower risk.
In some sense, 3CRV/lvUSD pool represents an index fund. A fund of the best appreciating stable assets meta-vaults:
Note: we incentivize the 3CRV/lvUSD pool with ARCH tokens and meta-vault stable coins (like: OUSD). These stable coins are the interest the meta-vault pays
Archimedes has a growing portfolio of underlying assets. They are all self appreciating, never negative APY assets. As a LP you get paid interest by all these assets, which smooths out any APY fluctuations.
Auto compounding and Archimedes “Earn”
With all the different tokens we are also considering an “Earn” function to simplify the user experience.
We offer another layer that automatically compounds and increases 3CRV/lvUSD liquidity, based on the preferences of the LP.
3.2. “The borrower”: Leverage takers (LT) aka “Alice”
Alice creates a leveraged position over one of the assets we offer (like: OUSD).
For example: Say OUSD offers 12% APY. With x4 Archimedes leverage, Alice gets 48% APY (gross of commissions and fees).
Where the funds are coming from?
Archimedes borrows the funds for leverage from Archimedes Curve pool and its LPs. Meaning, leverage is scarce. We need a way to distribute it (see below). That also allows us to create a “leverage market” (more on that later).
How does Alice get access to leverage?
Occasionally we will increase the leverage cap. When we do, we open up an auction for accessing leverage:
- We will announce a new leverage allocation amount and start a Dutch auction
- We set a starting price.
- Price is set in ARCH token. Meaning, how many ARCH tokens are needed to buy $1 worth of leverage.
- Price declines at a rate of 2% every hour
- Alice can decide to accept the current price, or wait for it to decline (running the risk that someone will grab all available leverage)
- Auction ends when investors buy all available leverage or when we hit a predefined floor price
What is Alice doing with “access to leverage”?
4.1. Alice here, I want to take leverage…
Q: So, can I take an infinite amount of leverage?
A: No. Curve liquidity is limiting leverage. Also, Archimedes limits leverage to fraction of current Curve pool liquidity, to sustain Curve pool balance and keep the system healthy. The protocol governance will change max leverage multiplier from time to time
A: Not in the case of OUSD. You provide OUSD in and get OUSD out. OUSD might have different value than $1, but still it is OUSD
In the off chance that OUSD loses peg, user might not be able to repay all the debt and is stuck in the position until OUSD regain peg (or there is enough interest gained to cover debt)
Q: How do you cash out?
A: You have two ways to exit the position.
- Unwind it. Give Archimedes your position NFT. We will unwind it for you and send back the principal and accumulated interest (Archimedes doesn’t charge exit fees).
- Sell the position NFT on any NFT marketplace. Since leverage is scarce, you might be able to sell it for a premium
A: Yes. Like any other (sustainable) lending market lenders require interest. Archimedes protocol fees are:
- 0.5% origination fee
- 30% of profits from asset yields
Q: What happens after I create a position? Does it live forever?
A: Position lives for 12 months. After 12 months users have a few options:
- Pay more ARCH tokens and keep the position active - we call it “renewal” (Price is dynamic and determined on renewal)
- Unwind the position
- Sell the position to someone else (that is also willing to pay ARCH for leverage)
- Do nothing - in this case we increase fees to 100% until user pays ARCH or unwind the position (user keeps principle and earned interest - we don’t touch those)
4.2. Bob here, I am a liquidity provider. A few questions…
Q: How do you maintain pool balance so I won’t get locked in the pool?
A: We maintain pool balance in a few ways:
- We carefully regulate the leverage cap. When we allocate more leverage it is always a small percentage of the total 3CRV in the pool
- We control the on-going fees leverage takers pay. We can incentivize leverage takers to close a position
- We also have a treasury that we can use to replenish liquidity in our pool
- We are industry “insiders”. We are working hard to create partnerships with large LPs to commit to provide liquidity to our pool