A Deep Dive Into Platypus Finance
There is still room for innovation in the decentralized exchanges world, and Platypus is an example of it
Most popular existing decentralized exchanges (DEXes) such as Uniswap or Curve rely on a mathematical model called invariant curve. This is the relation that defines the balance between coins in a pool. The topology of these DEXes is known as constant function market makers (CFMM), and although they are a great financial innovation and function correctly most of the time, their nature makes them have certain shortcomings:
- Double-side liquidity: adding liquidity to a pool requires adding all the coins (usually two) in equal amounts. This reduces the usability of these pools, since some holders just hold one coin and might not be interested in swapping part of it to another coin.
- Liquidity fragmentation: there is redundancy in the coins that each pool contains, existing several pools that might contain the same asset, like USDC. This segregates liquidity which in result reduces efficiency by increasing slippage.
Platypus circumvents these defects by not relying on an invariant curve design, but introducing a new account model that keeps records of assets and liabilities for each coin. This model allows Platypus to share liquidity and liquidity providers to deposit just a coin in a pool, something known as single-sided liquidity.
The Account Model
The mentioned account model is simple to understand: each coin has two variables known as “Asset” and “liability” . “Liability” is the total amount of a coin deposited over time as liquidity in the pool, while the current amount of coins that remain in a pool available to be exchanged is tracked as “Asset”. With this in mind three scenarios can happen:
- A deposit: increases the “Asset” and “Liability” count of the deposited coin.
- A withdrawal: decreases the “Asset” and “Liability” count of the deposited coin.
- A swap: decreases the “Liability” count of the coin that is exchanged from and increases the “Asset” and “liability” count of the coin that is exchanged to.
This can be easily understood with the next account balance diagram:
These “Asset” and “Liability” variables are divided between each other to calculate what is known as Coverage Ratio. This is the metric that dictates the fees that one might need to pay when withdrawing, depositing or exchanging coins.
Incentivizing to keep the peg
It is in the own interest of the Platypus protocol that each pool remains as balanced as possible. That means that there is an equal amount of value of all coins as liquidity in the pool. To achieve this Platypus incentivizes or penalizes each possible action depending on the current state of the pool. This is done tracking the variable that tracks the balance of each asset, the coverage ratio.
The Platypus fee structure is such as:
- Swap fee (haircut): like a conventional trading fee, set in most pools at 0.02% in the main pool and 0.04% in the alternative pools. Part of ths is collected to support the development of the protocol and other part is distributed to liquidity providers.
- Deposit fee: only charged when the coin deposited is the one in abundance in the pool, this means when coverage is greater than 100%. If it is lower than 100% then no deposit fee is applied.
- Withdrawal fee: only charged when the coin deposited is the one in deficiency in the pool, this means when coverage is lower than 100%. If it is greater than 100% then no withdrawal fee is applied.
This fee structure aligns liquidity providers to compensate the pools, for example by incentivizing them to provide the more scarce asset and by penalizing the withdrawal of the asset that is lacking.
Slippage fee
The Platypus team realized pretty early that even though initially it was not needed, an “slippage arbitrage fee” was needed to be introduced later in order to keep the incentive of not imbalancing the pools by large swaps. This would penalize actions that deviate coverage ratios and incentivize actions that converge coverage ratios towards the balance. This slippage fee is dependent on the coverage ratio in the next way:
This means that when the coverage ratio is over 0.6–0.7, the pool is considered very balanced and the slippage fee is minimal, very close to 0%. But as soon as the coverage ratio passes 0.5 and below, the slippage fee starts to increase rapidly. At 0.3–0.4 fees ramp up easily to 50% or more. This penalizes greatly to swap out a coin that is in scarcity respective to the other coins in the pool.
Platypus Progression
Platypus Finance was a project incubated with the help of Ava Labs, so it has been deployed only to Avalanche Network so far. In March 2022 it had a maximum of $1.2BN, and after the whole market deleveraging is currently standing at around $160M. As can be seen in the next chart, the price of its governance token, PTP, has been closely following the progression of the TVL in the protocol. Interesting nevertheless:
After studying the protocol thoroughly, we have been very impressed by the simplicity that the new account model proposes, and how correctly it seems to be working in all the Platypus pools. We think that is a phenomenal alternative to the already existing “curve-like” AMMs, with very convenient improvements compared to them. As in other AMMs, the health of the protocol is highly dependent on the incentives offered to the liquidity providers. Giving them a share of a small trading fee might not be sufficient, and in the long term, incentives based on PTP rewards could not be the best lasting solution for the protocol. Nonetheless, we will keep monitoring the behavior of Platypus and its pools. It will be specially interesting to see how their models work in case of an edge scenario where some pegged asset might trade at a premium/deficit.
