Themis and Connext provide increased crosschain liquidity efficiency
- Themis Protocol increases the efficiency of liquidity pools within Defi. It allows users to deposit their yield-bearing tokens as collateral and borrow stablecoins against them.
- Themis has partnered up with Connext, the most secure interoperability protocol, to unlock new use cases for crosschain liquidity: routers will run more efficiently, and Themis users will be able to access liquidity on any chain.
Phase 1: Increased liquidity efficiency for Connext routers
Connext Amarok, the latest protocol upgrade, introduced the concepts of passive and active liquidity in the network.
Active liquidity is required to front capital to users and protocols that will otherwise have to wait for a longer period of time, depending on the latency of the underlying messaging layers that Connext is built on.
This liquidity will be provided by entities running a piece of offchain infrastructure: routers.
Passive liquidity is required on some chains to swap NextAssets into canonical assets, the flavor of a wrapped / native token most used on that chain. This is an onchain stableswap AMM where anyone can easily contribute with a simple onchain transfer.
Active liquidity provided by routers affects the latency of transfers.
Passive liquidity provided by users to AMMs affects the price of transfers.
While Amarok has semi unified liquidity by chain (in the previous version of Connext liquidity was divided per route, ex: Polygon-Avalanche; now routers simply provide exit liquidity on a specific chain, independently from where it comes from), liquidity might be fragmented between active and passive.
In order to bootstrap the initial liquidity on the AMMs, we designed a flow with Themis where routers can add liquidity to the AMM (earning AMM fees), and use the received tokens as collateral in Themis so they can borrow stablecoins. They can then use those for their active liquidity.
- In order for this to function the LP tokens from the AMM will be bridged from the specific chain where the AMM liquidity was provided to Ethereum
- Themis will enable the deposit of those LP tokens on Ethereum, and unlock assets borrowing (ex: USDC)
- This asset will be bridged back to the initial chain, converted into a NextAsset (ex: NextUSDC) with 0 slippage, and used for active liquidity
- Themis’ flexibility allows to set up borrowing rates at a fixed interest rate so it’s easier for routers to calculate profitability
Benefits
- Connext increases the liquidity on the AMMs and on its active liquidity front
- Routers can easily decide when they want to allocate more active liquidity (i.e. borrow more funds from Themis) or leave assets on the AMM when there is low network activity on a specific chain.
- Operations for routers will see increased sources of yields (AMM + active liquidity). Their operations will be profitable if those yields will be higher than the borrowing interest rate on Themis
- While at start the operation will be manual, we expect new automatic tools to be born soon (the routers track is already looking into this)
Risks/Complexities
- As with every new lego money integration, more smart contracts mean additional risks. Both platforms will go live with the integration after the audits have been completed
- Liquidation of collateral: any borrowed position incurs some risks.
Considering that:
1) The collateral and the borrowed tokens correspond to the same asset (ex: NextDAI-DAI and DAI)
2) the stable-pair collateral generates interest
3) 1 NextDAI is always redeemable for 1 DAI (no algorithmic peg but fully collateralized lock)
we expect liquidations to be extremely rare.
Phase 2: Themis will upgrade with crosschain functionalities
The upcoming Themis 2.0 is a powerful improvement that will accept not only Uniswap V3 positions (ERC721) as collateral, but also any ERC20 yield bearing token such as the ones from Balancer, Curve, and others.
This means Themis will have increased market opportunities on multiple chains, but its liquidity might become more fragmented on each domain.
Thanks to the integration with Connext, users will be able to deposit collateral on any chain, and access Themis liquidity on any other chain.
For example, a Uniswap LP token can be deposited on Optimism, and then USDC can be borrowed on Polygon where the interest rate/liquidity is more beneficial.
This new, improved, crosschain liquidity will become a fundamental tool for traders, market makers, DAOs and institutions that will want to maximize their returns on any domain.
We’ll keep you posted on the progress of this integration as it comes live with Amarok in a few weeks.
Learn more
We are hosting a Twitter Space on whatsNext for Liquidity together with Themis, Arrakis and Trader Joe:
About Themis
Themis is a decentralized lending protocol that allows users to collateralize their liquidity positions to borrow stablecoins & blue-chip assets.
Liquidity providers can now borrow against their LP positions for the first time. Unlock the value of your LPs while your funds remain in the liquidity pool generating yield. In addition to borrowing, users can lend and farm assets and also bid on liquidated positions via Dutch Auction.
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About Connext
Connext is a network for fast, trustless communication between chains and rollups. It is the only interoperability system of its type that does this cheaply and quickly without introducing any new trust assumptions. Connext is aimed at developers who are looking to build bridges and other natively cross-chain applications. To date, over $1.5b in transactions have crossed the network.
