Platypus Finance: The New Solution for Stable Asset Swaps on AVAX

This report provides an analysis of Platypus Finance

Curve is the largest protocol in DeFi by total value locked and has proven itself to be one of the most critical defi primitives, offering low-slippage stable asset trading enabled by an innovative bonding curve. This was achieved when Curve implemented the stableswap invariant which concentrated liquidity around a specific price and greatly reduced slippage. The stableswap invariant enables more capital efficient liquidity provision for assets with the same price including stablecoins or other price-stable assets (renBTC & wBTC).

Curve provides the critical function of maintaining stablecoin pegs through its price stable AMM and incentivization of LPs through CRV emissions. The Curve platform is the base liquidity layer for major stablecoins, providing stability and yield across the ecosystem. The importance of Curve is evidenced by the battle between protocols and whales to gain voting power through veCRV to influence emissions and direct liquidity to certain pools. Deeper liquidity is crucial as it means lower slippage and a larger buffer before stablecoins lose their peg.

Curve has a stronghold on the Ethereum network for stable asset swaps given its strong network effects and CRV tokenomics which incentivizes long-term participation. Although Curve holds a dominant position on Ethereum, competition for TVL is heating up on Curve’s second largest market, Avalanche.

Introducing Platypus Finance

Platypus aims to become the dominant and native option for stable swaps in the avalanche ecosystem. As avalanche continues to grow and mature, deep liquidity is important for stable assets to retain their peg. Platypus launched on alpha mainnet on November 29, 2021 and is backed by three arrows capital, DeFiance capital, and Avalaunch, a launchpad for the avalanche ecosystem. Since launch, TVL has grown exponentially to reach over $1 billion as of this writing. Platypus has innovated on Curve’s model to provide a differentiated solution that offers improvements on liquidity provision, user experience, and tokenomics.

How Does Platypus Finance Work?

The Platypus team identified a few problems with existing AMMs such as Uniswap or Curve. Existing AMMs consist of constant function market makers which require LPs to deposit token pairs or bundles to enable functional pools. In this way, the liquidity provider is exposed to impermanent loss and is short the volatility of the tokens being supplied. This introduces friction to the user experience and entails unwanted risk. Constant function market makers also typically funnel individual token pairs into closed off pools which fragments liquidity and lowers the capital efficiency of the system. Another disadvantage of stableswap platforms like Curve is that the pools have limited scalability since the stableswap invariant requires that each token has the same amount of liquidity to reach equilibrium.

In order to resolve these issues, Platypus has designed a new AMM model based on asset liability management rather than a constant function. In the AML model, LP deposits are considered a liability to the protocol with the corresponding coverage ratio for each asset acting as the key parameter rather than liquidity. Price oracles determine the prices of the assets, while the actual exchange rate is a function of the coverage ratios of the two corresponding pools involved in the swap. Platypus implements slippage and haircuts into the protocol to disincentivize trades that substantially reduce the coverage ratio of any pool and pose default risk. Rather than being determined by a bonding curve, slippage for trades on Platypus is determined by a single-variant slippage function that maps the coverage ratio of a token account to a slippage value. When a user makes a swap, they are altering the coverage ratio of two tokens and therefore the ultimate slippage experienced by the user will be the combined slippage value. This model incentivizes the convergence of coverage ratios and disincentives the divergence of coverage ratios. For example, in the below screenshot, swapping USDT at a ~ 82% coverage ratio for USDC at a 98% coverage ratio results in positive slippage.

Likewise negative slippage is incurred for swaps from USDC to USDT:

The equilibrium state of a token pair is one in which the coverage ratios are the same. Platypus also charges a fee called a haircut that is partially retained by the protocol in a reserve with the remaining amount distributed to users as profit. This split is determined by the retention ratio which will be subject to governance. This fee also acts to add further incentive to the convergence of coverage ratios by ensuring the haircut fee is less than or equal to the fee incurred by swaps that increase coverage ratio gaps.

This AML-based AMM allows for single-sided liquidity provision which improves the user experience and contains price exposure to one asset. Furthermore it eliminates impermanent loss as users get back the same deposited token amounts upon withdrawal in addition to any pool rewards they’ve earned. Unilateral liquidity provision also unlocks pools to scale according to organic supply and demand rather than the lowest liquidity token acting as a bottleneck for pool growth. Instead of fragmenting liquidity into separate pools, Platypus improves capital efficiency by creating an ‘open liquidity pool’ in which liquidity is shared across all token pairs.

Although Platypus eliminates impermanent loss in the context of traditional AMMs, the risk to LP’s principal amounts is transformed into default risk referred to as “impairment loss”. In the scenario that the Platypus system becomes insolvent, the loss is borne pro-rata by all liquidity providers upon withdrawal. The system becomes insolvent when total assets drop below total liabilities. Additionally token exchange rates are dependent on oracle prices which adds another risk variable to the system. The lack of an internal price-finding mechanism based on market supply and demand could cap Platypus’s growth as price eventually would be determined on platforms with lower liquidity levels which would be more prone to data manipulation. Additionally, when the system is solvent, users will be able to withdraw the same amount of value they deposit, but there is no guarantee they will be able to withdraw the same token they deposited.

Tokenomics

The protocol’s native token is PTP, which has a maximum supply of 300 million. The token allocation is as follows:

The following is a rough representation of token distribution over time incorporating vesting schedules and lock-up periods.

Currently, the only utility of the PTP token is staking to accrue vePTP. Although inspired by Curve’s veCRV model, Platypus’s vePTP has a different implementation. The only way to acquire vePTP is by staking PTP which earns .014 vePTP every hour for every 1 PTP staked. Once users unstake, their vePTP balance goes to zero. Additionally, vePTP is non-transferable and non-tradable. Although the vePTP tokens are not explicitly locked up, users are highly incentivized to keep staking PTP to retain their vePTP balance because vePTP allows users to earn higher PTP emissions on their deposits.

The liquidity mining program diverts PTP emissions into three pools: base pool, boosting pool, and AVAX-PTP liquidity pool.

Base pool emissions are distributed pro-rata to liquidity providers solely based on deposit amounts. No vePTP is required to earn emissions from the base pool. In order to earn boosting pool emissions, however, users must have a deposit balance and hold vePTP. The weighting of each LP eligible to earn emissions in the boosting pool is represented by the square root of the product of the deposit amount and vePTP amount. This means that users can boost their emissions by either adding additional liquidity or increasing their vePTP balance. Users that hold vePTP earn rewards from the base pool and the boosting pool simultaneously meaning that their total return is a combination of the two. The total emissions for each individual pool is a function of the pool’s weighting which is derived from Platypus’s interest rate model, explained in a later section.

Platypus’s vePTP model has a similar incentive design as Curve’s veCRV. The staking function adds value to the native token PTP, encouraging demand and long-term staking which reduces the circulating supply. Additionally, staking PTP aligns the incentives of the liquidity providers more closely with the protocol. Although specific plans for governance have yet to be announced, vePTP will likely be a centerpiece.

Stress Test: The Delisting of $MIM

The Platypus system was tested towards the end of January, when $MIM experienced a slight de-peg in response to a series of negative events in Danielle Siesta’s “frog nation” of which MIM is closely tied. Decentralized exchanges experienced significant strain as selling pressure continued to cause an imbalance in liquidity pools that supported $MIM. Stablecoin pools on Curve were, at some points, composed of over 90% $MIM. Despite the significant selling pressure, Curve was able to remain operational and keep $MIM’s peg given their deep liquidity and deposit bonuses that incentivized users to rebalance the pool. Platypus, at an early stage for the protocol, also experienced significant selling volume on $MIM. The MIM selling pressure significantly reduced the coverage levels of the other stablecoins in the pool and threatened the solvency of the system. In response, the Platypus team halted deposits, withdrawals, and swaps until the pools could be rebalanced. In order to rebalance the system, the team bridged $85 million worth of $MIM to Ethereum mainnet and made an OTC swap for USDC, which ultimately leaned on Curve to swap the assets. This event sparked criticism from the community arguing that the Platypus is too centralized and needed their main competitor, Curve, to save them when crisis hit. As a response to the event, the team delisted MIM from the platform citing the need for assets with similar risk profiles during the growth stage of the protocol. This is a key distinction for protocols that leverage shared pool designs. Risk is not contained within individual markets for specific token pairs but is distributed across the whole system which means that the team must be diligent with asset listings. Despite a drop in TVL related to the event, Platypus has continued its steady rise upwards.

Recent Upgrades / Roadmap

Withdrawal and Deposit Fees

Platypus’s design is vulnerable to withdrawal arbitrage attacks which could leak value from the system. This strategy only works when a pool’s coverage ratio is equal to or less than 1. Below is a walkthrough of how the attack works:

1. A user owns 20% of liquidity in a USDT pool with 100 tokens and a coverage ratio of 1.
2. The user then purchases 20% of tokens in the pool by swapping with another token which brings the coverage ratio down to .8 and incurs slight slippage costs.
3. The user withdraws the 20 tokens they were providing as liquidity and brings the coverage ratio down to .75
4. The user then reverses the original swap they made and earns positive slippage for converging the coverage ratio and bringing it from .75 to 1 with assets and liabilities both equaling 80.

Since the magnitude of slippage is determined by the change in coverage ratio, the positive slippage will outweigh the negative slippage, since the move from .75 to 1 is greater than the move from 1 to .8. The reverse process, called deposit arbitrage, is another possible exploit. Deposit arbitrage requires a pool to have a coverage ratio greater than or equal to 1.

Small deposit and withdrawal fees based on coverage ratio levels were implemented into the protocol to prevent these types of attacks. The deposit and withdrawal fees are small but ensure that attackers do not use flash loans to magnify returns from these arbitrage strategies and introduce additional risk to the system.

Interest Rate Model

The Platypus team has also introduced a new interest rate model to direct liquidity mining PTP emissions in a way that incentivizes users to balance pools and converge coverage ratios. Prior to this model, the team saw a risk in persistently superior yields on certain pools having the potential to cause sustained pool imbalances and increase the risk of illiquidity in the system. In order to solve this, the interest rate model ties PTP pool emissions to the coverage ratio. In essence, the higher the coverage ratio, the higher the emissions. This may seem counterintuitive at first, so let’s walk through an example.

Consider two pools:

USDT: Assets = 80, Liabilities = 100, CR = .8

USDC: Assets = 120, Liabilities = 100, CR = 1.2

With the new interest rate model, USDC will earn a higher yield which will incentivize users to do the following:

1. User unstakes 20 USDT which drops assets and liabilities of the USDT pool both by 20.
2. User swaps USDT for USDC which increases USDT assets by 20 and decreases USDC assets by 20.
3. User stakes USDC which increases assets and liabilities both by 20.

Now we have the following:

USDT: Assets = 80, Liabilities = 80, CR = 1

USDC: Assets = 120, Liabilities = 120, CR = 1

The interest rate model didn’t change anything at the asset level but reallocated liquidity to balance each pool’s coverage ratios.

Road to Decentralization

Platypus is an early-stage, innovative protocol and is therefore subject to new challenges that haven’t been experienced by the first wave of DeFi protocols. As a result, the project remains fairly centralized with upgradeable smart contracts controlled by a multisig wallet enabling a strong element of control by the team. This allows developers to respond quickly to exploits or bugs and iterate on the platypus design as it is tested in the market. Protocols that decentralize before having a proven product lose the flexibility and speed of their centralized counterparts. Nonetheless, the team is committed to progressive decentralization and has recently taken the following actions:

• Updated 5 out of 9 multisig to include 5 AVAX stakeholders including Traderjoe, Pangolin, Benqi, Yield Yak, and Avalaunch
• Published the core smart contract code publicly on Github
• Announced plans for governance and voting to be implemented in the protocol’s decision-making process with the protocol eventually being fully governed by the community

Although these actions may seem small in scale, they increase security and allow for greater community feedback and involvement. These steps are also aligned with team’s claim of progressing towards a more decentralized future, which is a good sign of further decentralization measures to come.

Competition

The main competitors to Platypus for stable-asset trading on Avalanche are Curve and Embr Finance. Curve was the first to launch on AVAX in August of 2021, with launches for Platypus and Embr in November and December of 2021, respectively. As a well-established protocol with a proven product and first mover advantage, Curve was able to attract close to $1 billion in TVL before Platypus even launched. Despite the later start, Platypus has closed the gap to a very narrow margin to become the fifth largest protocol by TVL on the avalanche ecosystem at the time of writing. Platypus was able to appeal to the market by offering an innovative solution for stable swaps that achieves higher capital efficiency and lower slippage given the same amount of TVL. Platypus also worked to improve the user experience by creating a more simple and intuitive user interface and allowing for single-asset liquidity provision. This, along with the liquidity mining incentives that allowed liquidity providers to earn high yield on their stablecoins, have contributed to Platypus’s rise in TVL. Embr leverages Balancer V2’s vault design and smart order routing while also implementing pools that use Curve’s stableswap invariant for pegged assets. Embr has struggled to reach the same adoption as Platypus and Curve, likely due to their lack of innovation and unique market position for stable swaps.

Conclusion

Platypus and Curve provide a critical function for Avalanche that will scale with the growth of the network. Considering the benefits of having liquidity aggregated on one platform, it is likely that one protocol will rise to become the dominant solution for stable asset swaps on Avalanche. Platypus is branded as an AVAX-native project that has innovated on Curve’s model to eliminate impermanent loss and improve the user experience through a simple UI and single-sided liquidity provision. Platypus has reached significant adoption since its launch in November, even inspiring its own forms of Convex, in Vector Finance and Echidna. Platypus even briefly passed Curve in TVL despite Curve’s first mover advantage. Although Platypus has experienced success over the last few months, Curve has a proven model with a strong track record of reliably handling tens of billions of dollars for years. Will Platypus overcome Curve to serve as the foundational liquidity hub for stable asset swaps on AVAX? Ultimately, the market will decide.