Leverage Takers borrow from Archimedes’ Curve pools to create leveraged positions on appreciating stablecoins (like OUSD). Archimedes wraps each leveraged position with an NFT.
These type of positions pose risks to users. Here are the main risks for users:
1. Liquidation Risk
Borrowers typically have the strongest risk exposure coming from liquidation.
The Archimedes protocol has decided to launch without a liquidation mechanism.
Here is how it works:
- If the OUSD peg drops below $1 to a value where Borrowers do not have enough OUSD to pay their leveraged debt, this would typically cause a liquidation of the users’ collateral. In this scenario Archimedes will instead lock the users position until there is enough OUSD to pay the debt (either by OUSD regaining its peg or by the position earning more yield over time)
- Furthermore, if the user’s position is locked and they still want to exit, they have the option to trade their position NFT in an NFT marketplace, such as OpenSea.
This non-liquidation approach may change over time and it may vary depending on the type of asset the user provides as collateral. The team will clearly outline these changes or differences to its users should they occur so that users can asses the risk / reward properly.
2. Underlying Asset Risks
You may have seen some stablecoins depeg for long periods of time — even prominent and widely used stablecoins. Traditionally, this may result in the related leverage positions being liquidated.
To mitigate this risk, Archimedes partners only with blue chip yield bearing stablecoins.
The Archimedes Team performs its own due diligence on many stablecoins and their related protocols before partnering with them. We consider many factors such as:
- Only over collateralized assets
- Strong battle tested peg mechanisms
- Audited tech
- Doxxed and serious teams
- Great reputation in the industry
- Archimedes’ protocol audit
If all criteria are met, Archimedes may then pursue a partnership.
Additionally, we are working to diversify the underlying assets, which will greatly reduce overall risk. As we introduce more asset position options it will increase diversification for both Leverage Takers and Liquidity Providers
3. Variable Fees Risk
Traditionally, lending fees fluctuate on most borrowing protocols making it hard for Borrowers to predict the long term costs of their loans.
At Archimedes, there is no charge of an interest rate and borrowers pay upfront for leverage access in ARCH tokens. This greatly increases the borrowers ability to project the profitability of their position and evaluate their strategy.
4. Smart contract risks
It’s well known in Defi that smart contracts have intrinsic risks. Borrowers are exposed to Archimedes’ proprietary smart contract and, secondarily, to OUSD’s smart contract.
This is why Archimedes has an ongoing partnership with Halborn Security to audit and guarantee the quality and security of every change the team makes to its smart contracts. You can view our Audits here. This is also why we are so thorough in our due diligence when selecting partners, as mentioned above.
Additionally, Archimedes will soon be announcing a Bug and Code Bounty Program (stay tuned!), which will bring the benefit of White Hat Hackers performing a second layer of quality and security audits.
Archimedes is an experimental protocol and carries significant risks: Smart contract risk, economic model risk, risk that the assets Archimedes introduces and many other types of known and unknown risks.
Archimedes' team never provides investment advice. This article is NOT financial advice. DYOR.
Participate at your own risk.