Archimedes Finance is a leverage protocol supercharging stablecoin assets. We do this by providing access to high leverage on natively appreciating stablecoin strategies, like OUSD from Origin Protocol.
Being a leverage provider puts Archimedes in a unique place. We are responsible for allowing users to open and close large stablecoin positions on-chain, and with this responsibility comes the need for stability.
How Does Leverage Work on Archimedes?
Before we get into Archimedes NFTs and the rationale behind using them vs. standard “IOU style” LP tokens, first lets briefly go over how a leveraged NFT position is created on Archimedes. Archimedes’ leverage is conditional, meaning that you are only allowed to borrow and deploy leveraged liquidity into whitelabel strategies built by Archimedes. This is in contrast to traditional money markets where borrowers can use their loans freely in DeFi.
When a user wishes to leverage their appreciating stablecoin through Archimedes, they must first purchase ARCH tokens to use as payment required for opening the position, which will vary depending on the leverage multiplier and the demand for leverage. The users assets are routed through Archimedes’ Leverage Engine, matched with lvUSD, Archimedes USD stablecoin, and then looped through the Curve pools back into the users’ original deposit asset. This value is then finally wrapped into an NFT before being deposited into the user’s wallet.
Benefits of NFT-Wrapped Leverage
The users’ position is wrapped as an NFT to allow it to be tradable and composable throughout DeFi, while also allowing for custom metadata traits. This grants us some flexibility in the future where we can individually change custom loan durations, interest, leverage, etc. More importantly, to our users and to the DeFi community, this type of utility brings an entire new series of benefits to both NFTs and DeFi.
Bridging NFT users to DeFi: Archimedes NFT is primarily designed to bridge NFT users to DeFi. Most NFT users know about DeFi, but are not as well versed in the technology itself. This new design allows us to tap into a whole new opportunity that is the Total Addressable Market (TAM) coming from users of NFT marketplaces interested in leverage positions. We also believe this will raise awareness to a whole new financial primitive that is DeFi, by way of new DeFi users who started with NFTs.
Selling and buying Archimedes NFT in a market: For our DeFi native users, having Archimedes leveraged position NFTs, allows them to continue to enter and exit these positions on the secondary NFT markets. For NFT users that don’t want to ramp into DeFi, they are able to enter and exit Archimedes positions by buying NFTs in those markets. Though, we believe this might happen for a premium benefiting the DeFi user as a means to compensate for their time spent ramping into DeFi, while the NFT user saves time by just buying their NFT position.
As previously mentioned, users who wish to open a leveraged position on Archimedes must pay for leverage using the ARCH token. This will mean that depending on the market’s desire for leverage, it’s very possible that the price for leverage could be very high. In this situation, users may want to shop around the NFT markets to bid on existing positions and try to gain access to leverage for a cheaper price.
Additional rewards to lenders: If a borrower sells their NFT on a marketplace, royalties may incur from that transaction, which would then be used to reward lenders in our Curve pools.
Access to more liquidity for borrowers: Having a leveraged position wrapped as an NFT also allows users to collateralize these positions by using NFT lending platforms and borrow against the position wrapped as an NFT, leading to increased capital efficiency for the borrower. This way, the Archimedes borrower is able to extract additional liquidity (and have more capital to invest) without triggering a taxable event, or winding down their position and paying all the swap fees to go backwards through the Curve pools. While this strategy may increase efficiency for the borrower’s capital, it’s also worth noting it also adds more layers of risks related to other protocols.
Risks for Archimedes
We believe that NFT wrapped positions will boost demand for leverage even higher, mainly due to the NFT to DeFi user bridging. This is highly unlikely, but this may cause the Curve pools to imbalance. Archimedes solves for this pool imbalance risk by throttling access to leverage, which can be achieved by gating the amount of leverage we allow users to take, as well as by pricing that access to leverage via Dutch auctions for the ARCH token.
Using NFT wrappers for high leverage trades also adds some more conceptual risks. If OUSD < $1 such that the leverage taker does not have enough money to pay their debt, their position is locked into an NFT until they can pay their debt again. This could lead to liquidity risk and increased opportunity costs for our users. Nevertheless Archimedes NFTs are liquid on secondary markets like Opensea and Looksrare, which allows Archimedes users to properly price their exposure and position in the NFT relative to its illiquidity within its platform.
Archimedes Without NFTs?
What would Archimedes look like without wrapping their positions into NFTs? If not wrapping the positions into an NFT, Archimedes would be ignoring a whole new TAM coming from NFT users interested in such a novel financial primitive. Archimedes would also miss the creative DeFi users employing the NFT for different purposes and in different ways, such as the ones discussed above.
Lastly, our lenders would not benefit from the bonus APY coming from NFT sales royalties and from the additional user acquisition from larger brand exposure, which would then reduce buy pressure on ARCH, reducing lender APY, making the liquidity less “sticky”.
This all would make the protocol “less complete”, but still highly competitive due to its ARCH token utility and mechanism.
By wrapping Archimedes positions into NFTs, we are tapping into a larger addressable market, allowing for more granular control over future implementations of the Archimedes Protocol, while helping maintain sticky liquidity. In the future we may add different metadata traits that allow users to access different leverage ratios, position durations, and more!
All Archimedes NFT positions are tradable on the secondary marketplace, which gives our users the ability to accurately price their exposure, and provides Archimedes with an additional source of revenue through royalty fees which can be used to increase the native APY of our products. Archimedes is committed to providing “sticky,” long term liquidity to DeFi.
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.