Platypus’s Asset Liability Management, ELI5

Platypus introduces the concept of liability to DeFi protocols as we build the system on Asset Liability Management.

The idea of a brand new StableSwap is fascinating. But how exactly Platypus works? What’s the mechanism behind? The yellow paper details our design, but if it’s TL;DL, here’s the ELI5 for everyone.

The Concept of Liability

The key concept underpinning Platypus is Asset Liability Management (ALM); a design uncommonly seen among AMM protocols.

In the existing StableSwap, liquidity providers (LPs) will be rewarded LP tokens when making deposits, representing their partial ownership of a pool. However, pools are often composed of multiple assets. Any user action could alter the token ratio in a pool. Consequently, the LPs’ asset amount might have changed upon withdrawal.

Asset-Centric vs Liability-Centric System

Table 1 illustrates a protocol built on an asset-centric system.

Peter owns 100 units of Token A before Mary’s action. However, Peter’s asset becomes 40 units of Token A + 60 units of Token B (Total Tokens = 100) once Mary has deposited 100 units of Token A + 300 units of Token B into the pool.

On the other hand, Platypus is different in that liability is recorded.

LPs’ deposits are still converted into LP tokens. Nevertheless, Platypus LP tokens will specify the exact amount and the exact token that they have deposited. Users will (in normal scenario) receive the same amount and proportion of their tokens upon withdrawal.

Table 2 illustrates a liability-centric system.

The tokens will not mix up because Token A and B each own their respective balance sheet. Therefore, Peter will be able to withdraw the exact amount of Token A he has deposited regardless of Mary’s action.

The Coverage Ratio

With liabilities in mind, Platypus becomes the first StableSwap to introduce a pool’s coverage ratio.

Coverage ratio defines the system’s equilibrium states. It is an essential parameter to our protocol since it needs to be maintained above a certain level to avoid default. In particular, the amount of a withdrawal request exceeds the amount of assets in a token account.

Coverage Ratio = Asset/Liability

Table 3 shows that the coverage ratio for USDT is 0.909 (1,000/1,100), ETH 1.033 (31/30).

In Platypus, when a swap happens, liquidity (in the system pool) for the swap-from token increases, while liquidity (in the system pool) for the swap-to token decreases. Platypus encourages convergence towards equilibrium and penalises the divergence from equilibrium. Therefore, we have established price slippage as a function of coverage ratio.

Next Up: Coverage Ratio & Marginal Slippage

And that’s all for today! Next time we will talk about how we use coverage ratio to calculate marginal slippage. Stay tuned!