Archimedes changes leverage rules in DeFi

Leverage can entail various forms of risk. This is especially true for Decentralized Finance (DeFi). Traditionally, leverage involves taking an already risky lending position on a crypto asset and “doubling” it by borrowing more with the same asset.

When investors take a leveraged position on most DeFi platforms, they are left with three main problems:

1. leeway: Some DeFi platforms take advantage of their borrowers because they make money from liquidating them.
2. Unpredictable costs: Variable fees are industry standard and will fluctuate based on market conditions. This leaves them in a position of constant insecurity which can cause them to lose money.
3. Intrinsic collateral risk: The underlying assets in each position carry their own risks. Depeggs and hacks are not uncommon.

Archimedes solution for DeFi borrowers and lenders

Archimedes is a pioneering DeFi lending and lending platform that takes a new approach to market efficiency and sustainability by avoiding these common traits through its innovative mechanisms and great user experience. In general, its product is: It aligns incentives for all stakeholders, has a predictable and innovative fee model, offers best-in-class sustainable APY from real economic activity and a robust, state-of-the-art issuance design, offers auto-compound capabilities, and is tradable in NFT marketplaces.

More specifically, it offers leverage takers (borrowers):

1. Reduced risk of liquidation: The protocol’s revenue incentives aren’t about liquidating users. They are aligned with the best interests of our users. Because of this, Archimedes chose to start without a liquidation mechanism.
2. Calculable innovative fee model: Leverage takers prepay their fees when users post collateral and participate in Archimedes novel bidding approach, to pay for leverage in ARCH, Archimedes’ governance and utility token. With this bidding mechanism, the Archimedes team provides leverage at a given starting price that decreases over time until a floor price is reached or all leverage is exhausted, whichever comes first. This bidding approach is also known as a Dutch auction. The aim of the bidding system is to find the fair price for the leverage each time the leverage cap is increased and new leverage is made available. Since leverage is scarce, users waiting for the price to bottom inevitably miss an opportunity to gain leverage. Also, the variable interest payments do not need to be tracked.
3. Market Top APY for Reliable Stablecoins: It offers up to 10x leverage on battle-tested revenue-generating stablecoins for leverage takers. This translates to an estimate of up to 50% APY in current market conditions, which is a great return.

   In addition, Archimedes offers new features not currently available on any other platform to provide a simple user experience:

4. “Set and forget”: No need to manage position. No manual compounding or changing positions.
5. Tradability: Archimedes packs the position into an NFT. This allows users to trade it without unwinding it. Because leverage allocation is limited, some investors might be willing to pay a premium for these NFTs.

Overall, this allows borrowers to safely and transparently build leveraged positions tradable as NFTs based on a revenue-generating stablecoin.

For liquidity providers (lenders or LPs) Archimedes offers Market top APY from:

1. Real Yield: Archimedes LPs earn income from real economic activities created by the platform, such as: B. Fees generated when users open a new position and performance fees for LT positions.
2. Innovative dynamic emission: Because of his innovative dynamic ARCH token issuance Archimedes’ design and real-yield approach eliminates the need for LPs to hop from pool to pool to earn a higher APY. In this novel approach, Archimedes calculates the ARCH issuance volume every two weeks based on the ARCH price and the APY offered by other top-of-the-market liquidity pools. The goal is to avoid over-inflation and maintain long-term rewards that are attractive to liquidity providers.

Finally, the Archimedes partner protocols can be used long-lived capital in their pools while Archimedes finds a solution to make APYs sustainable and adaptive to reward liquidity providers appropriately in all market conditions.

Residual Risks

However, none of this is to say that Archimedes will find a solution to every existing risk in DeFi leveraged trading. There are a number of risks inherent to all DeFi projects that the Archimedes team is constantly working to mitigate, now and in future iterations of the protocol.

• Protocol Risk: There is always a risk that the smart contracts that govern the protocol will have unknown bugs and bugs that can be exploited or simply fail. To prevent this from happening, Archimedes is constantly reviewing its smart contracts with companies like Halborn to reduce risk as much as possible.
• Over Leverage and Depeg: If Archimedes offers too much leverage, his curve pool could become unbalanced. This would expose liquidity providers to high slippage when they wish to withdraw their funds. Because of this, the protocol limits the amount of leverage available to borrowers at any given time.
• Unexpected behavior of the underlying assets: Positions taken on the Archimedes Protocol are inevitably dependent on the performance of other assets in the DeFi ecosystem. Despite the protocol’s reliance on mature assets like OUSD, it’s not impossible for these to suffer unexpected downturns.

Likewise, there are always other unknown risks that might show up as the DeFi space continues to be a testing ground. For a detailed analysis of Archimedes’ risks, read the project’s blog post on the subject.

DeFi markets continue to evolve rapidly, iterating over new concepts and ideas about what constitutes an efficient market. The Archimedes Protocol presents a novel solution that breaks with established practices in this area that can be viewed as predatory, harmful or unsustainable for borrowers and lenders alike.

As the next bull market approaches, it is these new and fairer approaches to concepts like leverage that will better serve market participants.

Learn more about Archimedes on the official website. The project is also open source and counts with a fully doped team, so don’t hesitate to read its code base on Github. Archimedes will soon release a public version of its roadmap ahead of the ARCH token launch in 2023.

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