The observation that started it all
In the DeFi ecosystem, several projects employ win-lose relationships among their stakeholders: “I win only if they lose”. In the lending and borrowing space, among other examples, this presents itself through protocols focusing on liquidating users as their main revenue source.
As a consequence of this:
- There are very few long term investment options.
- Opposing sides are fighting each other. It is hard to get different stakeholders to build together, such as whales vs. shrimps or protocol vs. users.
- Most users end up losing.
These are challenges that are present in any financial system. But DeFi is different: it is an open blockchain. And real, on-chain transparency is the missing piece that solves these problems.
The Problem For Users
User 1: “I seek a sustainable yield coming from real economic activity”
A great fit to be a Liquidity Provider, these users hold positions in stablecoins summing large amounts, and provide liquidity on Curve.
But there are a few challenges impairing this user’s ability in getting what they look for:
- CRV emission isn’t tied to actual trade volume. That's why we see CRV yield going down as more projects and users discover the benefits of Curve.
- A large enough position affects a Curve pool’s yield and drives it down. Investors need to slice their holding and manage several smaller positions.
- CRV emission fluctuates. Investors often need to hop between pools to maintain APY.
We believe that CRV emissions are capping Curve's ability to scale. And we all want to see a stablecoin Curve pool that supports large investments without materially impacting the pool’s APY. Ideally, this pool provides relatively good yield, generated from real economic activity.
User 2: “I have a long term view on DeFi and I want to take a long term position on the future state of the DeFi ecosystem”
These users are what we call “DeFi Natives” and are looking for protocols that can support their long term view.
For example, these users believe that:
- Stablecoins yields are going higher sometimes in the near term.
- There is going to be significant volatility in the DeFi market in the next 3 months.
- There will be a large volume going back and forth between ETH and WBTC.
These “ecosystem level” plays either don’t exist or are impractical as a long term position. These users take some kind of short or long position, exposing them to liquidations. They are also exposed to spikes in lending fees. They are in a win-lose situation, where everyone is waiting for them to lose.
How do we serve these customers
Lenders (a.k.a. Liquidity Providers or LPs)
We call users who seek yield from real economic activity Liquidity Providers or LPs, since they provide liquidity to our Curve pool.
These users are also known as lenders, and through our Curve pool, they lend funds to users seeking to take positions in the ecosystem: Users we’ll call Leverage Takers or LTs. LPs then earn their interest from LTs paying for lending them funds (and not from CRV emissions).
LP interest payment might come in the form of:
- ARCH token emissions to the Curve pool: Emissions of Archimedes’ governance and utility token. ARCH could then be sold on the open market by LPs to LTs who want to take leverage.
- Stablecoin from other fees: Borrowers pay origination and performance fee, in the asset that the strategy is opened. The Protocol might decide to distribute them directly to active Curve LPs.
- ETH from NFT trade: Users trading their position NFT will generate ETH from secondary royalties. We may use this to reward LPs.
- Partner governance token: We might reward LPs with bonus tokens from partner protocols incentivizing the pool.
Archimedes emits reward payments to the Curve pool, using standard Curve pool gauge to distribute it among all LPs.
Borrowers (a.k.a. Leverage Takers or LTs)
On the other side, the borrowers or LTs, pay all the loan interest upfront to earn up to 10x leverage on yield-bearing stablecoins.
There are no on-going interest payments for LTs. Instead, the fee structure is:
- One time payment for access to leverage with ARCH token in our Dutch Auction
- One time interest payment of 0.5% at the origination of the position
- Ongoing performance fee. 30% of position profits
Additionally, there is no incentive for anyone to liquidate the position, and if the position becomes too risky, the protocol might decide to close it without any penalty to the borrower.