A Deep Dive into Dynamic Withdrawal Pools
Dynamic Withdrawals — The Solution to Instability
One of the most important points of mastery for any protocol’s liquid staking solution is how it systematically and reliably maintains a fair exchange rate with the native asset it represents. After all, if the staking derivative can’t maintain a reliable and stable price, how can investors maintain trust in the system? In the case of Yield Yak’s liquid staking solution which uses Geodes infrastructure on the Avalanche network, this is the peg between yyAVAX & AVAX, which is maintained through a process we call Dynamic Withdrawals.
This article will provide deeper insight into the technical functionality of Dynamic Withdrawal Pools, and how Geode uses this methodology to maintain a fair exchange rate between AVAX & yyAVAX. Every DAO that implements Geode’s liquid staking solution on Avalanche (and becomes a Planet in our Universe) will have access to the same tools, allowing their users to have confidence in the peg of their staking derivative.
Understanding the P & C-Chains
First it’s worth understanding the staking infrastructure on Avalanche and the different chains that operate within it. Unlike other chains which you might be more familiar with (such as Ethereum), the Avalanche blockchain boasts 3 separate and distinct chains which are validated and secured by the Platform Chain. Each of these three chains has a special purpose, and it’s separating the functions and interactions that occur on each of these chains that allows Avalanche to operate at the speed, scalability, and efficiency it’s known for. These chains are the X-Chain, P-Chain, and C-Chain. For now, we’ll focus on just the P & C chains.
Liquid staking is needed to allow people to stake and take advantage of DeFi, and for non-delegation chains like Ethereum, it enables users to stake with less than the minimum requirement. On Avalanche, this means interacting across the different network chains. The P-Chain is also known as the Platform Chain. It is the metadata blockchain on Avalanche and coordinates validators, keeps track of active subnets and enables the creation of new subnets. The P-Chain’s primary function is for staking AVAX and serving as a validator. Additionally, this is where validator staking rewards are received.
The C-Chain, or Contract Chain, allows smart contract functionality and is where we see all the DeFi activity occurring today.
The Current Problem With Liquid Staking
For liquid staking to function properly, we need to be able to bridge assets between the C-Chain and the P-Chain. This fact necessitates other liquid staking solution providers to maintain a percentage of their AVAX on the C-Chain or to implement a withdrawal delay period.
With a surplus of AVAX on the C-Chain, stakers are ultimately sacrificing a potentially higher yield, as not all of their AVAX is staked, thereby leaving profits on the table. Furthermore, if demand for AVAX ever exceeds what has been put aside, the price between AVAX and the staked asset can be severely damaged, ruining confidence in the system even if it’s fully backed. Alternatively, forcing stakers to wait for locked up AVAX to be unstaked before they can withdraw their assets, as you can imagine, is not ideal and makes for a poor user experience for the investor.
With that said, solving this inherent problem has some large benefits for both stakers and the DAOs by providing a more flexible and resilient staking solution while also providing the increased yield that users are looking for. Higher yields and a smoother user experience are both great TVL drivers, benefiting DAOs greatly both from increased staking fee revenue and all the advantages that high TVL brings.
Enter Geode’s Solution: Dynamic Withdrawals
Dynamic Withdrawals can be summarized as the mechanic behind a decentralized stable-price lending pool designed to allocate any amount of requests all without the need to keep a surplus of AVAX on the C-Chain or deal with a waiting period on withdrawals. Dynamic withdrawals provide the key methodology behind our withdrawal pools which provide exit liquidity from any Geode derivative representing staked AVAX (in this case, yyAVAX) back to regular AVAX.
We accomplish this by directly linking a pools node operator to the liquidity pool itself. Our withdrawal pools have three distinct phases, all controlled by the node operator for the particular staked AVAX derivative. In the case of Yield Yak’s yyAVAX token, this duty is assigned to Eden Network.
Dynamic Withdrawal Pool phases are explained below:
The Growth Phase:
This is when there is a net influx of AVAX into the pool as more users acquire yyAVAX to take advantage of this yield-generating asset. This results in a surplus (of AVAX) which is now staked to generate yield in the form of additional AVAX.
The Stable Phase:
Maintaining stability is key. As such, inflows & outflows of AVAX from the dynamic withdrawal pool must remain within a certain range that is deemed acceptable. In this phase, there is no real growth or decline in the TVL of the pool.
Just as an example, if the price deviates more than a chosen acceptable range of say 4%, then the pool will move into The Resurrection Phase where a rebalancing of assets takes place.
The Resurrection Phase:
This occurs when there is a large debt in the withdrawal pool due to a net flow of stakers swapping their yyAVAX tokens back into the chain’s native AVAX token. As a result, the price of yyAVAX begins to fall out of the acceptable range. In this scenario, validators/delegations are unstaked in order to pay the debt in the pool and bring the price back within the predetermined acceptable range. Doing so brings the pool back to The Stable Phase.
Ultimately, this process allows the node operator to dynamically manage the supply of AVAX on the C-Chain relative to the market conditions for the staking token, allowing for the maximum amount of AVAX to be staked and generating yield. The withdrawal pools from a user’s perspective will act similar to other LP pools, and will give yyAVAX holders additional yield opportunities by allowing them to provide liquidity to the withdrawal pool to earn LP fees generated from each transaction.
An Example:
An investor may use the withdrawal pools to swap yyAVAX for AVAX. If the transaction causes the price to de-peg, then the withdrawal pool goes into debt (more yyAVAX than AVAX in the pool). When in debt, the node operator will buy back yyAVAX with any available liquid AVAX within the system such as from AVAX that has become available after its staking period has ended. TheyyAVAX token that the node operator purchased will be burned bringing the price back in line and the burning mechanic ensures there is always 1 AVAX per yyAVAX in circulation.
In the future, when there are more protocols partnered with Geode and more of their respective liquid staking assets in circulation, the concept of the dynamic withdrawal pool remains the same. There will be singular pools for each asset pair where the dynamic withdrawals process and related steps all take place in tandem with one another. That way, no matter how many different protocols partner with Geode, each asset will be able to remain stable and maintain value independent of one another.
Continued Education
Dynamic Withdrawal Pools are an important part of Geode’s liquid staking infrastructure, but there are many other components to learn about as well! Thankfully, our documentation hub provides a wealth of knowledge on all things Geode related — from understanding key technical aspects, to integration guides, and audits.
As Geode’s universe expands to other Galaxies (chains) and partners with more Planets (DAOs), the opportunities for DAOs and their users to generate additional yield will grow and grow. Our journey is just beginning and we’re happy to have you along with us for the ride. Buckle up!
How Do I Engage With Geode?
If you’re a representative from a DeFi project or protocol and are interested in integrating with Geode, join our Discord and contact Oranges in the Operations Department or feel free to email him directly via oranges@geode.fi.
To stay up to date on the latest Geode developments, follow us on Twitter and join our Discord. For more educational content, follow us on Medium. Ready to blast off? Visit Geode.fi!
