Research Summary
The report discusses the progress of the Arcadia Collateral Risk Simulation project, a partnership between Llama Risk and Pragma Labs. The project aims to develop a simulation tool to enhance the economic security of the Arcadia V2 Protocol by identifying and minimizing the risk of bad debt.
Key Takeaways
Arcadia Protocol V2 Overview
- Non-custodial platform: Arcadia is a non-custodial platform for asset management through lending and margin accounts. It allows users to access margin credit by providing a portfolio of assets as collateral.
- Lending mechanism: Arcadia operates a two-sided lending market between liquidity providers and borrowers. Liquidity providers deposit capital into pools and earn interest paid on loans, while borrowers deposit a range of assets as collateral to take out loans.
- Liquidation process: Arcadia uses a Gradual Dutch Auction for liquidation. The process allows for partial liquidations to reduce market impact and has three possible outcomes depending on the final selling price relative to the debt and liquidation penalties.
The Simulation
- Simulation tool: The simulation tool aims to emulate historical price and liquidity scenarios in the market. It will assign optimal parameters that maximize protocol revenue while minimizing the occurrence of bad debt.
- Simulation “Success” Metrics: The success of the simulation is measured by the Net Insolvent Value Percentage of the Entire Protocol, Asset Net Insolvent Value Percentage, and Slashing Run Percentage. The simulation also tracks Net Protocol Revenue and Net Protocol Revenue per Asset.
- Parameter Recommendation: The simulation will run with different parameters to find the combination that meets the safety criteria and achieves the highest Revenue metrics.
Current State of the Project
- Phase 1: The first phase involved the coding of the initial modules, including the Market Module, Backstop Module, Liquidator Module, and Liquidation Engine Module.
- Phase 2: The project is currently in the second phase, which involves testing and evaluation of the model’s performance under simulated conditions.
- Next steps: The team plans to implement realistic scenarios for model validation in the coming week.
Actionable Insights
- Understanding Arcadia’s lending mechanism: Stakeholders should familiarize themselves with Arcadia’s lending mechanism, including its two-sided lending market and liquidation process, to better understand the protocol’s risk management.
- Monitoring the simulation’s progress: Stakeholders should keep track of the simulation’s progress and its success metrics to understand the potential risks and rewards of the Arcadia protocol.
- Anticipating future developments: Stakeholders should anticipate the implementation of realistic scenarios in the coming week, which will provide further insights into the protocol’s risk management.
