Arcadia Protocol (Part 3/3) — Creditors

As we’ve described in our prior posts, the Arcadia protocol comprises 3 key components: the Registry, the Accounts, and the Creditors.

To recap, the Registry is a non-opinionated, on-chain infrastructure that implements core pricing and risk management logic. The Arcadia Accounts are user-controlled smart contract wallets that streamline asset management and enforce margin requirements.

In this post we will describe the third component of the protocol, the Creditors.

The Creditors are simply smart contracts that issue debt to Arcadia Accounts. Examples of Creditors are lending protocols, perpetual futures contracts, options contracts, and escrow services, among others.

We built the first Creditor, Arcadia Lending, to serve as the underlying leverage provider for Accounts. However, anyone can build their own implementation of a Creditor (more on this below).

You can think of Arcadia as a two-sided marketplace. On one side, the Arcadia Accounts and on the other side the Creditors. Creditors issue debt against Arcadia Accounts while Accounts enforce margin requirements.

Arcadia Lending: The Underlying Leverage Provider for Arcadia Accounts

Arcadia Lending is the first implementation of a Creditor in the protocol. Below we highlight what makes Arcadia Lending different:

Partial liquidations

The gradual Dutch auction liquidation process minimizes market impact and provides a more orderly and fair mechanism for handling undercollateralized positions. This approach contrasts with the often abrupt and less predictable liquidation processes in other protocols, offering better protection for borrowers while ensuring liquidity providers are adequately compensated.

Interested buyers can place atomic bids for parts of the collateral, allowing for partial liquidation. This means that only a portion of the borrower’s collateral is sold off to bring the account back to a healthy state, rather than liquidating the entire collateral all at once.

Risk Tranches

Arcadia Lending’s implementation of risk tranches allows liquidity providers to choose their preferred risk-reward profile, which is not commonly offered in other lending protocols. This feature enables users to customize their investment strategy within the same lending pool, accommodating a wider range of risk appetites without fragmenting liquidity.

Use of ERC-4626 Standard

By employing the ERC-4626 standard for both debt positions and yield-bearing positions, Arcadia Lending enhances gas efficiency and ensures seamless composability with the broader DeFi ecosystem. This standardization allows for easier integration with other protocols and infrastructures.

Variable Interest Rates Based on Utilization

Arcadia Lending dynamically adjusts interest rates based on the pool’s utilization rate, ensuring a balance between supply and demand. This flexible rate mechanism can lead to more stable and equitable returns for liquidity providers and more competitive borrowing rates for borrowers, compared to fixed rates or less responsive variable rate models in other protocols. At the same time, variable interest rate based on utilization models have been battle tested and proven for years in DeFi.

Continuous Compounding Interest

Interest in Arcadia Lending pools compounds continuously, triggered by user interactions, which can optimize yield generation for liquidity providers. This real-time compounding can offer a more accurate and potentially higher yield over time compared to protocols that compound interest at fixed intervals.

Arcadia Lending is just the first implementation of a Creditor. In practice, Creditors can be much more than only Lending.

Anyone can create and deploy their own implementation of a Creditor that interacts seamlessly with the Arcadia Accounts.

Building your own implementation of a Creditor within the Arcadia ecosystem is designed to be accessible and flexible.

Benefits of Building a Creditor with Arcadia

• Access to a Broad Ecosystem: Implementing a Creditor within Arcadia gives you immediate compatibility with a wide range of DeFi products and services. Your Creditor can interact with Arcadia Accounts, tapping into an existing pool of users and liquidity.
• Reduced Development Time and Costs: By leveraging the Arcadia stack, you significantly reduce the time and resources needed to develop a Creditor from scratch. The stack provides ready-to-use components and guidelines, minimizing the need for extensive smart contract development and auditing.
• Innovation and Customization: The modularity of Arcadia encourages innovation, allowing you to create novel financial products and services that cater to specific needs or market gaps. Whether you’re looking to launch a new lending protocol, a derivatives platform, or any other DeFi service, Arcadia provides unmatched flexibility and customization.

In conclusion, Arcadia Lending is the first (of multiple) Creditors built on top of the protocol. It serves as the underlying leverage provider for Account owners.

The Arcadia protocol combines Accounts and Creditors to revolutionize the way financial contracts are closed between debtors and creditors who lack mutual trust. By eliminating the reliance on trusted intermediaries, we have created a system that significantly enhances capital efficiency for its users. It promotes transparent risk assessments and accelerates the launch of new protocols, all while steadfastly upholding the principles of security, self-custody, and decentralization.

You can read more details in our whitepaper: https://github.com/arcadia-finance/whitepapers/blob/main/main.pdf

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