There are many types of risk in this type of product. Archimedes has designed its tokenomics and mechanisms to mitigate risks to the best of its ability.
Here are some of the most relevant risks:
1. Curve Pool Imbalance Risks (and lvUSD Depeg)
A Liquidity Pool imbalance happens when there is more liquidity in one asset than the other asset in the Pool. It poses a risk to Liquidity Providers as the imbalance may prevent them from being able to withdraw their funds without causing high slippage or even a Depeg.
Like any pool, Archimedes’ Curve pool could be imbalanced in two ways:
- The Pool is low on 3CRV relative to lvUSD. This is the main risk for LP’s trying to withdraw their funds as it will cause slippage. In severe cases it could cause lvUSD to Depeg.
- The Pool is high on 3CRV relative to lvUSD, which is a positive imbalance. There is low risk in the case as Archimedes can increase the leverage cap (the supply of lvUSD) to rebalance the pool
Should scenario (1) occur Archimedes has 3 ways to mitigate this risk:
- Limit the amount of leverage available: This creates more demand and buy pressure for lvUSD. This will add 3CRV back to the pool and help bring it back to a balanced state.
- Incentivised Arbitrage: If lvUSD drops below $1 then Leverage Takers (Borrowers) are naturally incentivized to unwind existing positions, buy lvUSD for less than $1 and use it to reduce debt by $1, creating further buy pressure for lvUSD. Example:
- A user opens a 10x leveraged position with just 1,000 OUSD collateral
- So they borrowed 9,000 lvUSD which is converted to 9,000 OUSD bringing their total position size to 10,000 OUSD
- If the lvUSD peg drops 10% to $0.90 that user can now close their position and effectively convert their 9,000 borrowed OUSD to 10,000 lvUSD in the process.
- The funds retrieved by the user would be a 100% return on their initial 1,000 OUSD collateral
Monitor the Pool:
You can monitor balances and health of the 3CRV/lvUSD Pool on our Dune Dashboard here.
2. Underlying Assets Risks
Leverage Takers (Borrowers) borrow from the Curve pool to create leveraged positions on pegged assets (like OUSD).
In an extreme scenario where the OUSD peg drops below $1 and Leverage Takers do not have enough funds to pay their debt, their positions would be ‘locked’ because Archimedes does not use a liquidation mechanism. This would mean that Archimedes would not be able to collect performance fees which would then impose the risk to Liquidity Providers of not receiving the portion of their APY that come are made up of these fees.
In the future we might introduce a liquidation mechanism.
3. Smart Contract Risks
For Liquidity Providers (lenders), the relevant smart contracts are:
- Curve smart contracts
- Uniswap smart contracts
- OUSD smart contracts
- Archimedes’ smart contracts
The Archimedes team chose to integrate and partner with Curve, Uniswap, and OUSD due to their robust and battle tested products. As mentioned above, Archimedes conducts extensive due diligence on its product platforms and partners.
Our own Protocol smart contracts are regularly audited by Halborn Security to guarantee the quality and security of every change the team makes to its smart contracts. You can view our Audits here.
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.