alfprotocol

Abstract

Alf is a protocol for capital deployment on Solana for the purposes of liquidity

provision and yield farming, both with and without margin of up to 200x. The protocol introduces its own versions of an invariant-based Automated Market Maker

protocol for exchange operations and a money market for short-term loans. The

central contribution to the Solana ecosystem is a protocol for leveraged LP positions

in AMM pools and yield farming protocols.

Alf improves capital efficiency and facilitates more liquid markets by connecting low-risk, low-effort investors providing liquidity to lending protocols with risk-seeking, active management investors who focus on leveraged liquidity provision and yield farming positions.

Alf is a protocol for capital deployment on Solana for the purposes of liquidity provision and yield farming, both with and without a margin of up to 200x. The protocol introduces its own versions of an invariant-based Automated Market Maker protocol for exchange operations and a money market for short-term loans. The central contribution to the Solana ecosystem is a protocol for leveraged LP positions in AMM pools and yield farming protocols. Alf improves capital efficiency and facilitates more liquid markets by connecting low-risk, low-effort investors providing liquidity to lending protocols with risk-seeking, active management investors who focus on leveraged liquidity provision and yield farming positions.

At the core lies the protocol for leveraged liquidity provision into AMMs and yield farming. Complementary to that, Alf offers two protocols for unleveraged liquidity management: AlfMM (a decentralized exchange service) and AAlf (an overcollateralized borrowing service). The core purpose of both protocols is to provide entry points for traders and risk-averse investors, offering them a platform to trade and provide liquidity, all the while reining in additional revenue from indirectly providing liquidity to the Leverage Protocol.

Alf Leverage Protocol enables users to enter leveraged positions in various types of assets. The two primary uses that the Alf team envisions for the protocol initially are leveraged long/short positions and leveraged LP yield farming.

Ethereum is currently the leader in the smart contract space, with over 70,000 nodes compared to just 1,000 for Solana. However, Solana is considered to be an Ethereum killer because of its innovation and how it is tackling some of Ethereum’s weaknesses.

Solana, through its proof-of-history (PoH) protocol, is revolutionizing how blockchains work. By allowing validators to be in charge of their own clock, the transaction verification process is reduced since the nodes don’t have to put in processing power before they can verify various timestamps. Thus, improving the speed at which transactions are processed on the Solana network. The Solana network processes up to 60,000 transactions per second, surpassing that of Bitcoin, Visa, XRP, and Ethereum combined.

Solana’s DeFi ecosystem has grown to a certain level after a rapid growth phase, including AMM DEX, CLOB DEX, AMM for stables, Decentralized Stablecoin, Oracle, Lending protocol, derivatives, launchpad, yield farming, and asset management, among other things.

The Serum is positioned at the ecosystem level and is also a CLOB DEX.

Raydium, A DEX that integrates the order book and AMM liquidity.

Bonfida, as Serum front-end, includes modules such as bot trading strategies, APIs, and naming system.

Pyth, is the oracle that provides the price of traditional financial assets and the price of crypto assets.

We believe that the future of DeFi will be more professional and capital-efficient, that Uniswap V3 provides active liquidity management features, and that more Uniswap V3-based solutions will be promoted in this manner. The performance advantage (particularly the predictable scalability) lays a solid platform for DeFi’s further growth and capital efficiency.

Transaction Cost

The high transaction costs of Ethereum have stifled user adoption of DeFi. Users who wish to earn fee income on Uniswap V3 by modifying their range of liquidity provisions must pay gas fees, which might reduce their profit margins, especially during peak network traffic periods reaching $60.

The cost of completing a transaction using Solana, on the other hand, is $0.05. A self-evident advantage due to the significant difference in transaction costs.

The Solana main net’s TPS has now surpassed dozens of times that of Ethereum. Because Solana’s design throughput is 50k/s, it is capable of maintaining cheap transaction costs.

Solana can handle a massive number of requests at once without raising transaction fees or restricting user requests. At Alf, we feel that for our DeFi solution to gain widespread adoption, we need the cost-effectiveness that Solana provides to our users to expand our protocol successfully.

Target ratio and the slopes depend on multiple parameters and will be adjusted by Alf Council as trading data over the corresponding assets accumulates. The model pursues three goals:

Ensure protocol solvency at all times. Underlying assets and liquidation markets are prone to price action and volatility. Despite that, the collateralization level invariant must be kept, enacting prompt liquidations between the time any particular position enters an endangered state and the time when its collateral is worth less than the safety margin.

Enable frictionless deposits and withdrawals. Ideally, if a liquidity provider in AAlf closes her position, she should be able to withdraw her entire deposit on the spot, even if it is considerable in size. For a lending pool, this means that reasonably sized inventory should be kept on hand by the protocol, and once a withdrawal happens, the added incentives (shifting interest rates) should motivate other stakeholders to promptly adjust the utilization ratio to its target value, either providing additional liquidity or closing some of the loan positions.

Maintain high capital efficiency. As long as the first two properties are maintained, the protocol should minimize the amount of idle liquidity, i.e. liquidity that does not generate a yield. Idle liquidity reduces return rates for all liquidity providers, so it should be kept as low as possible, insofar as it does not threaten the solvency of the protocol.

A liquidity pool is a collection of funds locked in a smart contract. Liquidity pools are used to facilitate decentralized trading, lending, and many more functions we’ll explore later. Liquidity pools are the backbone of many decentralized exchanges (DEX), such as Uniswap. Users called liquidity providers (LP) add an equal value of two tokens in a pool to create a market. In exchange for providing their funds, they earn trading fees from the trades that happen in their pool, proportional to their share of the total liquidity. As anyone can be a liquidity provider, AMMs have made market making more accessible.

A liquidity pool can be thought of as a pot of cryptocurrency assets locked within a smart contract. The funds can then be used for exchanges, loans, and for many other applications.

By far the most popular use case for liquidity pools is on decentralized exchanges, which have become the backbone of the DeFi ecosystem. Decentralized exchanges allow users to swap cryptocurrency assets via smart contracts. They are able to achieve this through the application of an automated market maker (AMM).

A leveraged AMM LP position is therefore a bet on trading volume against price volatility, — since if the price diverges too far from the initial value, the impermanent loss will outweigh trading fees, triggering a liquidation event that may consume the principal in order to repay the creditors.

Aside from that speculative component, leveraged LP is attractive in certain market conditions or for certain assets — for instance, for stablecoin vs. stablecoin pairs, since, unless one of the pegs is broken, the volatility is known to be low.

Leveraged liquidity provision can be seen as one of the instruments facilitating liquid automated markets and extending the range of possible trading strategies.