Leverage can introduce various forms of risk. This is especially true in Decentralized Finance (DeFi). Traditionally, leverage involves taking an already risky borrowing position on a crypto asset and “doubling down” on it by borrowing more with the same asset.
When investors take a leveraged position on most DeFi platform, they are left with three main problems:
- Liquidations: Some DeFi platforms take advantage of their borrowers because they make money from liquidating them.
- Unpredictable costs: Variable fees are the norm in the industry and they fluctuate according to market conditions. This leaves them in a position of constant uncertainty that might make them lose money.
- Intrinsic collateral risk: The underlying assets in any position carry their own risks. Depeggs and hacks are not unheard of.
Archimedes’ Solution for DeFi Borrowers and Lenders
Archimedes is a groundbreaking DeFi borrowing and lending platform that takes a new approach to market efficiency and sustainability by eschewing these common characteristics through its innovative mechanisms and a great user experience. In general, its product: aligns incentives across all stakeholders, has a predictable and innovative fee model, offers top of market sustainable APY from real economic activity and a robust cutting-edge emissions design, provides auto-compound features, and is tradeable in NFT marketplaces.
In more detail, it offers leverage takers (borrowers):
- Lower liquidation risk: The protocol’s revenue incentives are not in liquidating users. They are aligned with our users’ best interest. That’s why Archimedes chose to launch without a liquidation mechanism.
- Predictable innovative fee model: Leverage takers pay their fees upfront, when users deposit collateral and take part in Archimedes’ novel bidding approach, to pay for leverage in ARCH, Archimedes’ governance and utility token. In this bidding mechanism, the Archimedes team makes leverage available for a given initial cost, which reduces over time until a minimum cost is achieved or all leverage is taken, whichever happens first. This bidding approach is also known as Dutch Auction. The goal of the bidding system is to find the fair price for leverage every time the leverage cap is increased and new leverage is made available. Since leverage is scarce, the users waiting for the price to bottom out are bound to miss out on the opportunity of obtaining leverage. Also, there is no need to keep track of variable interest payments.
- Top of the market APY on reliable stablecoins: It offers up to x10 leverage on battle-tested yield-generating stablecoins for leverage takers. This means an estimation of up to 50% APY in current market conditions, which is a great return.
Moreover, Archimedes offers new features that are currently not available on any other platform, all to provide an easy user experience: - “Set and forget”: No need to manage the position. No manual compounding or switching positions.
- Tradability: Archimedes packages the position within an NFT. This allows users to trade it without unwinding it. Since leverage allocation is limited, some investors might be willing to pay a premium for these NFTs.
Altogether, this allows borrowers to safely and transparently build leveraged positions that are tradeable as NFTs and are based on a yield generating stablecoin.
For liquidity providers (lenders or LPs), Archimedes offers top of market APY from:
- Real Yield: Archimedes LPs earn yield from real economic activity created by the platform such as fees generated when users open a new position, and a LT position performance fees.
- Innovative Dynamic Emission: Due to its innovative dynamic ARCH token emission design and its real yield approach, Archimedes’ liquidity pool eliminates the need for LPs to jump from pool to pool seeking a higher APY. In this novel approach, Archimedes calculates the ARCH emission volume every two weeks based on the ARCH price and the APY offered by other top of the market liquidity pools. The goal being to avoid overinflation and maintain long-term rewards that are attractive to Liquidity Providers.
Lastly, Archimedes’ partner protocols are able to enjoy long-lasting capital in their pools as Archimedes finds a solution to make APYs sustainable and adaptable to reward liquidity providers appropriately in any market conditions.
Remaining Risks
However, none of this is to say that Archimedes solves for every existing risk in DeFi leverage trading. There are a number of risks that exist for all DeFi projects that the Archimedes team is constantly working to mitigate now and in future iterations of the protocol.
- Protocol risk: There’s always a risk that the smart contracts that govern the protocol have unknown flaws and bugs that can be exploited or simply fail. To prevent this, Archimedes audits its smart contracts on an ongoing basis with firms like Halborn to reduce risks as much as possible.
- Over-leverage and depeg: If Archimedes offers too much leverage, its Curve pool could go out of balance. This would expose liquidity providers to high slippage when they want to withdraw their balances. This is why the protocol limits the amount of leverage that is available to borrowers at any given time.
- Unexpected behavior of underlying assets: Positions taken on the Archimedes protocol inevitably depend on the performance of other assets in the DeFi ecosystem. Despite the protocol’s reliance on mature assets like OUSD, it is not impossible for these to suffer unexpected downturns.
Likewise, there are always other unknown risks that could present themselves as the DeFi space continues to be an experimental field. For a detailed analysis of Archimedes’ risks, read the project’s blog post on the matter.
The DeFi markets continue to evolve rapidly and iterate over new concepts and ideas over what defines an efficient market. The Archimedes protocol presents a novel solution that breaks with common practices in the space that can be deemed as predatory, detrimental, or unsustainable to borrowers and lenders alike.
As the next bull run approaches, it is these new and fairer approaches to concepts like leverage that will better serve market participants.
Find out more about Archimedes on the official website. The project is also open source and counts with a fully doxxed team, so feel free to peruse its codebase on Github. Archimedes will soon be releasing a public version of its roadmap ahead of its ARCH token launch in 2023.