This paper investigates the Autonomous Rate Manager (ARM), a system built on the Internet Computer Protocol (ICP) designed to automate Liquity V2 loan rate management.
Liquity V2 is a decentralized protocol running on the Ethereum mainnet that allows users to borrow its stablecoin BOLD against collateral assets (including ETH, wstETH, and rETH). A key innovation of the protocol is allowing borrowers to set and adjust interest rates themselves.
The problem is that borrowers with interest rates below other borrowers face higher redemption risks. Simply put, this mechanism allows any BOLD holder to redeem it through the protocol for a combination of ETH worth $1 and liquid staking tokens (minus fees), and the system will deduct this amount from the collateral of borrowers who set the minimum interest rate.
This leads to interest rate-driven equilibrium, where user-defined interest rates adjust according to market conditions. Additionally, they also serve as the force stabilizing the BOLD peg exchange rate. If the price of BOLD rises above $1, borrowers can lower the interest rate, making borrowing less attractive while holding BOLD becomes more attractive.
If the price of BOLD falls below $1, borrowers can raise the interest rate, making borrowing more attractive, while holding BOLD becomes more attractive due to higher interest payments.
Manually checking and changing these interest rates is not an easy task; moreover, delegating interest rate adjustments to a third party requires trust. ARM was created for this purpose. It is an autonomous rate management smart contract on ICP that can handle all affairs on behalf of borrowers. In other words, ARM belongs to a new class of dapps that can autonomously act on your behalf in a decentralized manner without external triggers.
What is ARM?
As mentioned above, ARM is a decentralized automated Liquity V2 loan rate manager that acts like a reliable robot capable of automatically, efficiently, and decentralized adjusting the selected Liquity V2 rates on the Internet Computer Protocol (ICP).
Why did ARM appear on ICP?
One reason for choosing ICP is that it provides a tamper-proof general computing platform with very low trust assumptions. Smart contracts on ICP (referred to as 'containers') act as decentralized, stateful serverless services capable of interacting with web browsers, mobile applications, and other containers. In addition to high performance, the blockchain technology stack of ICP also supports complex DeFi services like ARM.
Liquity Research Director Robert Lauko emphasized another key reason for Liquity's choice to build on ICP, stating, 'Ethereum cannot bear the heavy lifting of autonomous rate management, so we turned to the Internet Computer (ICP) for a high-performance, scalable, and cost-effective decentralized solution.'
How to Use ARM
To use ARM, borrowers simply need to delegate interest rate adjustments to an Ethereum smart contract address using one of the frontends of Liquity V2. ARM handles the rest, retrieving information from Ethereum, calculating necessary adjustments, and optimizing interest rate adjustment costs and risks.
Subsequently, ARM manages the remaining processes, calculating and executing necessary adjustments using data from Ethereum while minimizing interest rate adjustment costs and risks, all without trusting any centralized infrastructure.
Key Advantages of ARM
Automation: ARM's intelligent decision-making means it eliminates manual work for borrowers.
Redemption risk mitigation: ARM's strategy balances interest rates and adjustment frequencies, reducing the redemption risk for borrowers.
Cost-effective: ARM applies batch processing techniques and benefits from the scalable architecture of ICP to reduce costs, including gas fees.
Trustless and secure: Borrowers' data and independence are assured, as no one can alter ARM's behavior. Borrowers still control their assets and can choose other on-chain or off-chain interest rate management entities at any time.
Inter-chain autonomy and decentralized interaction
In addition to the advantages of ARM, ICP technology also possesses the following unique features that allow borrowers to easily delegate interest rate management to container smart contracts:
Timer Function: This acts like a built-in alarm clock for the container smart contract, which rings once an hour, automatically checking and updating borrowers' interest rates without requiring any action from the borrower or activating any other external triggers.
Ethereum Integration: Containers can hold and transfer Ethereum assets. Additionally, Chain Fusion technology enables complete bidirectional interaction between container smart contracts and Ethereum smart contracts, meaning ARM containers can read real-time data from the Liquity V2 contract on Ethereum, such as debt, redemption fees, etc., and send transactions to Ethereum to adjust interest rates.
Reverse Gas Model: ARM handles its own gas and operational costs through fees and conversions.
DFINITY Research Director Yvonne-Anne Pignolet stated, 'The timer function and Chain Fusion are essential for providing autonomy and integrating multiple ecosystems.'
How ARM functions
The following are the component details of these functions in ARM.
Contract Architecture
The interest rate management system consists of batch management contracts on the Ethereum mainnet and rate management containers hosted on the Internet Computer.
Each batch manager contract has a pre-registered externally owned account (EOA) as its owner, which is the only address authorized to represent delegated loans for interest rate adjustments.
The EOA is securely generated through the threshold ECDSA signature generation mechanism of ICP, and the threshold ECDSA protocol allows ICP nodes to collaboratively generate transaction signatures that can be verified by Ethereum, even in the presence of malicious nodes and under adverse network conditions.
This means that no entity knows the private key of the EOA, and only a qualified majority of ECDSA nodes can jointly sign transactions for the corresponding address.
Features
The ARM container is triggered by a timer once an hour to check if the interest rate adjustment conditions are met. For this, the ARM container retrieves data from the Liquity V2 core contract through Chain Fusion technology.
More precisely, the ARM container achieves this through the EVM RPC container, which is used for communication between the container and Ethereum and other EVM-compatible blockchains.
The EVM RPC container sends requests to RPC providers and reaches consensus on their responses to ensure reliable and decentralized interactions with the EVM chain on behalf of other containers. If the conditions for exchange rate changes are met, the ARM container will use the EVM RPC container to create Ethereum transactions, obtain the transaction threshold signature for the corresponding EOA, and submit the transaction to the Ethereum network.
ARM containers also have a built-in fault tolerance mechanism that can resubmit failed transactions.
Sustainability
To compensate for the resource costs incurred in managing borrowers' interest rates, batch management contracts charge a fee, part of which is used to maintain a positive EOA ETH balance.
On ICP, each container has a Cycles balance that decreases according to the resources used by the container, similar to a prepaid model. Users can exchange ICP tokens for Cycles and send them to any container.
The Cycles balance of ARM containers must also be maintained above a preset threshold. To achieve this, a portion of the fees accumulated by the batch management contract will be offered at a discounted price to any user who replenishes Cycles for the ARM container using ETH.
Through this mechanism, the collected fees can sustainably and autonomously replenish the required balances on Ethereum and ICP without permission.
The Future of ARM and ICP
Running autonomous rate management strategies on ICP is not the end of the journey. For example, here are some further expansion ideas.
Liquity V2 users may not want to manually write Ethereum lending transactions and set interest rate parameters, as manual operations are cumbersome and error-prone. However, Liquity provides open-source frontend code, and some services host the frontend on centralized infrastructure. Therefore, to further reduce trust requirements, the Liquity V2 frontend can be ported to run on ICP.
Moreover, the open-source nature of ARM encourages developers to innovate and create custom strategies, these possibilities are not limited to Ethereum as Chain Fusion technology supports other EVM-based blockchains such as Base and Arbitrum, thus enabling the creation of forked versions of Liquity V2 with dedicated frontends and ARM mechanisms.
Finally, the potential of dapps like ARM also includes developing autonomous and self-sufficient DeFi managers for other algorithmic stablecoins and DeFi protocols.
As these suggestions highlight, there is room for more innovative ideas; in principle, any decentralized service that collects information from one or more chains and acts on your behalf without external triggers can be implemented using this approach.
Summary
ARM has changed the landscape of autonomous rate management; it is efficient, scalable, and trustless.
By leveraging the unique features of the Internet Computer Protocol, such as timers, chain fusion, and reverse gas models, ARM also points to a future of more complex, self-operating decentralized applications.
If you are interested in advanced decentralized financial tools, the capabilities of the Internet Computer Protocol provide a powerful platform for innovation.
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