Syracusia Upgrade: Phase 1 — Protected Single Pools

Protected Single Pools for LSDFi Liquidity Pairs

The development of “Protected Single Pools” is the first step toward the completion of the Archimedes Syracusia Upgrade’s final form, leveraged omni pools for synthetic assets and LSDFi liquidity pairs. Like the ETH/stETH pool on Curve. As I recall, it was one Tony Montana that said: first you get the Protected Single Pools, then you get the leverage, then you pool hop. Wise words — and right he was. Omni Pools are what we’re building, and the omnipool hopper (or just pool hopper) is the next layer of foundation for these pools. The pool hopper, is a mechanic that allows for LP collateral to hop from pool-to-pool, following the best yields options on liquidity pools whitelisted by the DAO.

When it comes to building Omni Pools, we like to use Smalls’s s’more theory: You can’t have some more before you’ve even had one of something. So, before we create Omni Pools we’ll be launching Protected Single Pools.

What are Protected Single Pools

Protected Single Pools are “single” in the sense that the LPs for these individual pools will not be doing any pool-hopping. They are confined to one Single Pool. Additionally, the LPs are protected by guardrails put in place by Archimedes, to help mitigate risks for liquidity providers of various risk profiles.

Archimedes’ Protected Single Pools are designed for DeFi users that want to use their idle ETH to capture the value being provided by LSDs and other synthetic assets — but with less risks. Protected pools help reduce a user’s risk of getting locked in the pool of the xETH, where X is the LSDFi protocol behind the synthetic asset. Should the yield pool for the asset strategy start to unbalance, Archimedes does the heavy lifting and removes liquidity on behalf of users.

New Yield Strategies

The first pools listed on Archimedes as new yield strategies will be: Alchemix’s alETH, Metronome’s msETH, and Jpegged’s pETH pools on Convex. These are what we consider ETH/xETH liquidity pools (in documentation), with the xETH asset being some sort of synthetic asset pegged to Ethereum.

In a similar fashion to our ETH pools, USD/xUSD pools will be built for fiat stablecoin maxis. Both of these strategies are for users with a low risk profile that want to earn a yield from their Ethereum without being exposed to impermanent loss (IL).

No IL — Low Risk Synthetic Assets & LSDs

The xETH and xUSD assets that allow for liquidity provision with no impermanent loss are typically referred to as synthetic assets, or in some cases LSDs (liquid staking derivatives). The core concept of LSDs is that the staked asset, which is entitled to some form of yield, now has a liquid counterpart that can play the DeFi lego game.

For example, FRAX does this by allowing users to deposit ETH for frxETH (part 1), as part of their dual-token LSD system. When a user deposits ETH into FRAX, the actual ETH is sent to FRAX’s Ethereum validator nodes to generate yields, and the depositor receives a liquid frxETH token as a receipt. Holding frxETH is similar to simply holding ETH.

To earn the yields entitled to the ETH staked by FRAX’s validators, users must stake their frxETH in the sfrxETH vault (smart contract), in return for a liquid sfrxETH token (part 2).At anytime, users can redeem their sfrxETH for more frxETH than they originally deposited. Here’s how:

• sfrxETH and frxETH initially have a 1 to 1 redemption ratio.
• When FRAX’s ETH validators accrue ETH staking yields, an equivalent amount of liquid frxETH is minted and added to the sfrxETH vault, creating excess (yields).
• As newly minted frxETH is sent to the sfrxETH vault, overtime 1 sfrxETH token can redeem more than 1 frxETH token.

xETH tokens such as alETH often accept LSDs (like sfrxETH or rETH) as yield-bearing collateral.

High Risk / High Reward LP Strategies

On the flipside, for users that are okay with a higher risk and impermanent loss, using ETH and USD as base assets, we’ll also be deploying ETH/X pools and USD/X pools. These are essentially Protected Single Pools where the X token is native to a DeFi protocol and used for protocol governance, rewards, or some other utility.

With protected pools guarding user assets, Archimedes adds yet another catalyst to one of crypto’s hottest topics this Summer, LSDFi.

Archimedes Enters LSDFi

LSDFi refers to a niche of DeFi protocols that are building products that service the needs of Ethereum’s LSD protocols and user base. Protocols like Lido and Rocket Pool are currently leading the LSD narrative in terms of staked ethereum dominance, however, there is plenty of room for protocols like Alchemix and Metronome to eat away at that market share, as they provide additional use cases for LSDs.

By creating protected pools for LSDs and other synthetic crypto assets, Archimedes is able to absorb a share of the liquidity flooding into this sector of DeFi and maximize the potential yields for the base asset hodlers.

Set it and forget it — Archimedes does the hard work

In any case, regardless of which pool a user chooses, our smart contracts do the hard work for them; auto-compounding rewards and actively managing the position by way of routine liquidity pool health checks. These health checks help give LPs that want to earn yields with their LSDs some piece of mind. Users can “set it and forget it”, knowing that if the pool falls out of favor for any number of reasons, Archimedes will withdraw the user’s assets in a timely manner. Assets that have been withdrawn from a pool will sit in an Archimedes vault as the base asset. In the case of an ETH/xETH liquidity pool, the base asset is Ethereum.

For an example of what “doing the hard work” looks like, let’s say you enter a pool you see on Convex for alETH and ETH (ETH/xETH) liquidity on Curve. At the time you enter, the pool has 55% alETH and 45% ETH reserves. Now, let’s say you go to bed and wake up to find that the pool you just entered has drastically changed overnight due to some macro FUD spreading on Crypto Twitter. The pool now holds 90% alETH and just 10% ETH reserves, as investors have left the pool in mass and swapped their alETH for ETH.

You could follow suit and exit the pool, but now the price of alETH has drastically depegged and you’ll be taking a big loss compared to when the pool was closer to 50/50. Your other option is to wait and see if the pool rebalances. At this point you can officially check-in to the Hopium Lounge, party of 1.

To avoid this outcome, you could have stayed up all night monitoring the pool so that you noticed the moment it started to go too far out of balance, but you know what — that’s hard work.

Risks & Mitigation

Protected Single Pools mitigate risks for our users in two ways:

• Whitelisted Liquidity Pools
• Auto Position Management

Whitelisted Liquidity Pools are chosen by the Archimedes DAO. Community members can join the governance conversations happening in Discord around proposed AIP’s (ideations), and vote on-chain using veARCH once an ideation becomes an official proposal. This method of creating proposals and voting is how the community chooses what assets to add or remove from the protocol.

The second mitigation factor, Auto Position Management, is handled by the Protected Pool Algorithm. This algorithm regularly performs two types of health checks on whitelisted liquidity pools via the isPoolHealthy function. These checks determine if user assets should remain in the pool or be withdrawn.

isPoolHealthy — Health Checks:

• Check #1 — Does the pool have enough “true” assets?
• Check #2 — Do Archimedes LPs make the pool imbalanced?

The check for “true” assets refers to whether or not a pool has enough of the base asset. If liquidity from Archimedes LPs make up the majority of base assets the first check will fail. Without enough true assets there is a chance that the base asset will significantly depeg. This check ensures that user assets are removed from the pool before this happens.

Similarly, the check for pool imbalance ensures that Archimedes LPs do not make up 35% or more of the pool’s total liquidity. If at any time Archimedes LPs exceed 35% of the pool’s TVL this check will fail. The reason for this check is, if Archimedes owns too much liquidity in a pool, then an emergency withdrawal from the pool can create a significant price impact.

If funds had previously been removed, and a pool returns to a healthy state, passing all checks, Archimedes will jump back in with the liquidity held in this pool’s vault.

Other Pool Risks

Other than risks being checked by the Protected Pool Algorithm there are also inherent smart contract risks to consider.

Archimedes builds on top of other protocols, and often benefits from their existing audits and well tested security measures. It is also these same measures that can end up being what puts Archimedes users at risk, if there is an exploit of an underlying protocol that is used for an asset strategy. For example, if we create ETH/alETH protected liquidity pools, but Alchemix is exploited, this is a risk users of the ETH/alETH pool are exposed to along with the risks of Convex, Curve and Archimedes’ own smart contracts.

When the Protected Single Pools first launch they will not be audited. However, Archimedes has a history of getting both smart contracts and frontend audits from Halborn Security, an industry leading cyber security company. Eventually, all features of the Syracusia Upgrade (Archimedes v2) will be audited.

Learn more about Archimedes

The Protected Single Pools are the foundation of Archimedes’ new yield strategies, which offer users: maximized LSD liquidity pair yields, leverage, and omni pools. All of which will be deployed on Ethereum mainnet and Arbitrum L2.

You can learn more about the Archimedes DAO and our latest developments of the Archimedes v2 (the Syracusia Upgrade) by visiting https://archimedesfi.com/ and following on Twitter, Discord, and Telegram.

Originally published at https://medium.com on June 22, 2023.