Archimedes: an Analysis of Protocol Risks and Mitigation
At Archimedes we strongly believe that reducing risks to our users is key for healthy long term growth. In this article, we breakdown Archimedes’ risks as well as how we mitigate them for our users.
As you probably know, DeFi’s risks are not for everyone: liquidation risks, smart contract risks, depegging risks, etc. — these are just a few of the risks we encounter in the ecosystem. Even for the most experienced users, the events and implications caused by those risks can still be hard to predict and hedge against. Also, if you’re new to DeFi, chances are you’re not yet familiar with them.
First, let us explain what Archimedes is: an experimental lending and borrowing platform. We build it on top of AMMs such as Curve. We enable:
(1) Borrowers (Leverage Takers) to earn up to 10x yield of what yield-bearing stablecoins such as OUSD, our launching partner, offer
(2) Lenders (Liquidity Providers) to earn sustainable higher APYs.
Now let’s get right into the risks!
Archimedes Risks can be broken down into two general categories based on our user segmentation:
- Borrowing risks, which are defined as financial risks for our leverage takers in this article
- Lending risks, which are here discussed as financial risks for our liquidity providers
Leverage Takers borrow from our curve pools to create leveraged positions on appreciating stablecoins (like OUSD). Archimedes wraps each leveraged position with an NFT.
- Liquidation risk:
Borrowers typically have the strongest risk exposure from liquidation.
We’ve decided to launch without a liquidation mechanism. And here is how:
If OUSD < $1 to the level that Borrowers do not have enough OUSD to pay their debt, this would typically cause liquidation of the users’ principal. Instead of liquidating our users, they will be locked in their position until they have enough OUSD to pay their debt.
Furthermore, if the user’s position is locked and they still want an exit, they have the option to trade their NFT in an NFT marketplace, such as OpenSea.
- Underlying asset risks:
On a more extreme level, we all have seen stablecoins go bad and depeg for long periods of times — even the most unexpected tokens. This would then mean the leverage position is worth very little — or even worthless in the most extreme cases.
To mitigate this risk, we partner only with bluechip yield bearing stablecoins. We perform our own due diligence on the stablecoin and the protocol before partnering with them and look into several aspects such as overcollateralized assets only, strong battle tested peg mechanisms, audited tech, doxed and serious teams, great reputation in the industry, among others. If all criteria are met, we then pursue that partnership.
Additionally, we are working to diversify our underlying assets, which will then help reduce overall risk related to their positions with Archimedes as we introduce more options for diversification of their position on their own discretion.
- Variable fees risk:
At most borrowing protocols, lending fees fluctuate, making predictability of the costs of the loans a hard task for the borrowers. At Archimedes, we don’t charge an interest rate and borrowers pay upfront for leverage access in ARCH tokens, increasing the user’s ability to understand the profitability of their position. This will allow them to evaluate their strategy with Archimedes more clearly and transparently.
- Smart contract risks:
As you know, smart contracts have intrinsic risks. Borrowers are exposed to Archimedes proprietary smart contract and, secondarily, to OUSD smart contract risks. This is why we have an ongoing partnership with Halborn Security to audit and guarantee quality and security for every change we make to our smart contracts, and also why we choose our partners carefully, as mentioned above.
Additionally, we will soon be announcing our Bug and Code Bounty Program (stay tuned!), which will then bring in the benefit of White Hat Hackers performing a second thorough layer of quality and security audits.
Our risk/reward ratio is a great opportunity for leverage takers, creating a great economic opportunity for our users.
Liquidity Providers provide assets to Archimedes 3CRV/lvUSD pools and receive interest. The protocol pays interest in different assets, such as ARCH tokens and stablecoins. Most Curve pools depend on temporary bribes and uncertain gauge allocations for APY. But, Archimedes ARCH rewards have innate utility and a fixed supply.
While liquidation is a risk borrowers are typically exposed to, Lenders tend to have a high collateralization ratio that protects them from major risks. Nevertheless, they still have significant risks they need to look out for when providing liquidity.
At Archimedes, we built tokenomics and mechanisms in a way to mitigate those risks to the best of our ability. Let’s take a look what that means for lenders.
- Curve Pool imbalance risks:
There are different situations where a pool could be imbalanced.
For our first scenario, the 3CRV / lvUSD pool is imbalanced with low 3CRV liquidity. In this case lvUSD de-pegs < $1 and Lenders cannot withdraw their funds without slippage. One good example of how this could happen is if there is over leverage.
There are two ways to mitigate this risk: (1) Leverage Takers are incentivized to unwind positions by buying lvUSD for less than $1 and use it to reduce debt by $1, and gain instant profit on this arbitrage, which creates buy pressure on lvUSD, or (2) we gate the amount of leverage available, creating more demand for lvUSD. Both mitigation strategies will add 3CRV back to the pool and can bring it back to a balanced state.
As a last resort for when lvUSD < $1, we can always use our treasury to replenish the pool if the mechanisms discussed above are not sufficiently effective.
For our second scenario, the pool could be low on lvUSD, i.e. there is “too much” 3CRV. That means the demand for leverage is too high and in this case we can increase supply for leverage, which creates more lvUSD and balances the pool out.
- Underlying assets risks:
There are two main risks here for extreme cases.
The more impactful risk is if lvUSD <<< $1, which is caused by major curve pool imbalances that Archimedes’ mechanisms and arbitrage strategies may not be able to mitigate or counteract against. This can then cause impermanent loss for the users withdrawing their liquidity from the pool at that specific moment.
Less impactful but still worth mentioning: Leverage takers borrow from the Curve pool to create leveraged positions on pegged assets (like OUSD). In an extreme scenario, borrowers would be locked in their positions for a long period of time, which would mean Archimedes would not be able to collect performance fees. This would then impose the risk to lenders of not receiving the portion of their APY that would come from these fees.
- Smart contract risks:
For lenders, relevant smart contracts intrinsic risks are Curve smart contracts, which Archimedes does not control, and, secondarily, OUSD, since it can risk borrowers positions and profits, which then causes risks to part of the lenders’ rewards. We chose both Curve and OUSD because of their robust and battle tested products. As explained above, we choose and vet our product platforms and partners very carefully, and this vetting process, we believe, should mitigate a lot of the risk for our users.
Amazing right? The story with Lenders is not different than with Borrowers. With risk mitigation to Lenders and our real yield approach to rewarding liquidity providers, we provide a very attractive risk/reward ratio for any investors looking to provide liquidity to our Curve pools.
Interested to learn more? Please make sure to read our User Documentation.
Want to be an early Liquidity Provider? Don’t hesitate to e-mail us at firstname.lastname@example.org if you’re willing to enjoy the benefits of being an early LP (stay tuned!), or keep an eye on our launch announcements to be able to provide liquidity directly to our Curve pools.
In addition to the risks laid out above, for both lenders and borrowers, there are always unknown risks we cannot anticipate. The way we mitigate this is by making sure we test our concepts to the best of our ability before we launch a new product. We also hire the best team, so that we can keep quality of work way above any acceptable threshold.
As you can see, Archimedes is using everything at its disposal to make the opportunity more attractive to its users. We’re launching soon with these great opportunities for both Lenders and Borrowers — stay tuned!
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.