Platypus Finance: A New Mechanism for Automated Market Makers
Platypus Finance is a single-sided Automatic Market Maker (AMM) for stablecoins built on the Avalanche network that is designed to optimize capital efficiency. Rather than requiring liquidity providers (LPs) to provide liquidity through token pairs (e.g. ETH-AVAX), LPs can simply provide liquidity through the provision of a single token type. This mechanism aims to improve upon the existing AMM framework by mitigating impermanent loss risk for LPs, reducing slippage for traders, and creating more capital efficiency throughout the broader ecosystem. Ultimately, Platypus is guided by the concept of asset liability management, which guarantees that anytime an LP withdrawals from a pool, they are returned the exact principal amount and token type as they originally deposited as well as the pool rewards they have accrued.
Many existing AMMs share similar shortcomings in their design, specifically around impermanent loss risk, capital inefficiencies, and UX fragmentation. To begin, impermanent loss occurs when a user provides liquidity to a liquidity pool and the price of the assets deposited changes compared to the original deposit. The greater the change becomes, the more the user is exposed to impermanent loss. So when an LP is obligated to provide liquidity in the form of token pairs or bundles they are constantly at risk for impermanent loss since the value of their original token pair might be different from the value at the time it was originally deposited. Capital Inefficiencies in AMMs generally arise through liquidity fragmentation and liquidity pairing. The former occurs when large amounts of capital become locked in the protocol, unable to be further utilized. The latter occurs when LPs are obligated to provide liquidity in pairs which, in essence, requires any potential LP to have an equal value of two tokens in order to even become an LP. Finally, UX fragmentation occurs when users attempt to access the composability in DeFi, but must navigate between many different protocols, each with their own unique design and experience. For instance, using Uniswap LP tokens as collateral on Aave is a basic layer of DeFi composability but requires a non-trivial understanding of each protocol’s respective interface. This can become challenging for even crypto native users.
To overcome these challenges and improve upon existing frameworks, Platypus has developed a novel single-sided liquidity provision mechanism, StableSwap. StableSwap enables lower slippage, higher scalability, and better UX. It also creates more flexibility around pool composition and liquidity provision by removing the requirement of token pairs. At the core this design is the principle of asset liability management (ALM), adopting coverage ratio as the key input parameter. Essentially, ALM maintains that LP deposits are considered a recorded liability to the protocol. As such, LPs receive LP tokens that specify the exact amount and the exact token that they have deposited into a liquidity pool. This ensures that LPs will get back precisely the same token amounts upon withdrawal in addition to any pool rewards that they have earned. ALM also allows each token to grow organically based on its natural supply and demand into a liquidity pool unlike most AMMs that require that all tokens have the same liquidity (in which case the least popular token becomes the bottleneck for the growth of the pool). Overall, this design enables Platypus to have a reliable metric of tracking its financial health, ability to lend out idle assets, and removal of impermanent loss.
How it Works
One of the core functions of the Platypus protocol is the StableSwap. This mechanism supports support dollar-pegged stablecoins and is intended to allow users to seamlessly swap tokens with minimal friction and reduced slippage for high value swaps. Each StableSwap transaction requires $AVAX for the gas fees and also includes a 0.01% transaction fee for liquidity provision.
Another primary function of Platypus is liquidity provision. Users can connect with Platypus liquidity pools to begin providing unilateral liquidity in which only one type of token is required. So users that wants to provide liquidity in the form of $DAI can simply connect their wallet to Platypus and deposit $DAI into the $DAI liquidity pool without being required to have a token pair (e.g. $DAI-$USDT). Users that provide liquidity can earn $PTP and share a proportion of the 0.01% fees collected from StableSwaps.
Mechanism Design and Tokenomics
There are two native tokens of the Platypus protocol: $PTP and $vePTP. $PTP is a governance and utility token that LPs can earn by providing liquidity and which can be staked to boost LP rewards, while $vePTP is a reward boosting token that is earned by staking $PTP. So, for instance, an LP provides liquidity in one of Platypus’s liquidity pools and begins to earn $PTP. They can then stake this $PTP to boost their LP rewards and earn $vePTP along the way. The $vePTP token further boosts their rewards, so the more $vePTP accumulated, the greater the LP rewards become.
$PTP has a total supply of 300,000,000 and can be mined in a variety of ways. First, users earn $PTP simply by providing liquidity in Platypus’s Base Pools. Second, users that provide liquidity can earn additional rewards from the Boosting Pool by staking $PTP tokens. This incentivizes secondary market activity for $PTP and encourages long-term staking.
The Boosting Pool also utilizes $vePTP, which is similar to Curve’s voting escrow token, $veCRV. In short, 1 staked $PTP generates $0.014 $vePTP every hour. $vePTP is non-transferable and cannot be traded. When a user unstakes their $PTP, any accompanying $vePTP that was accumulate falls to 0. This helps incentive long-term staking and mitigate volatility within liquidity pools, since LPs must also consider the opportunity cost of unstaking $PTP and forfeiting all of the $vePTP they have accumulated from liquidity provision.
Platypus has created a novel design around single-sided liquidity provision. The boosting rewards built into $PTP and $vePTP provide a long-term incentive to LPs to continue to provide liquidity rather than withdrawing their assets. This helps to stabilize pools and mitigate volatility, enabling Platypus to reduce slippage. It will be interested to see how this approach competes with traditional AMM frameworks, particularly in terms of TVL and secondary market trading.
Currently, there is roughly $550M in TVL on Platypus. Although this is down from their highs in mid-January, this signals that there is some traction for the single-sided approach.
One last thing to note, however, is that daily trading volume has trended downward to about $3M per day, down from its previous highs above $50M in mid-January.
Further Reading and Resources
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