Arkadiko: The Protocol Bringing DeFi To Bitcoin Through Self-Repaying Loans

Arkadiko: The Protocol Bringing DeFi To Bitcoin Through Self-Repaying Loans

The Arkadiko Bridge is a Mycenaean bridge near the modern road from Tiryns to Epidauros on the Peloponnese in Greece. The bridge dates back to the Greek Bronze Age, and it is one of the oldest arch bridges still in existence and the oldest preserved bridge in Europe.

Like the Arkadiko Bridge, the Arkadiko protocol aspires to serve as a perennial gateway bridging DeFi and a host of new financial applications to Bitcoin.

When asked about his inspiration for launching the project, Arkadiko Core Contributor Philip De Smedt commented, “We wanted to build something that can last for centuries. The world needs a new set of decentralized financial services that ultimately settle on Bitcoin, the biggest and most secure blockchain in the world. Arkadiko requires minimal trust from the user. Protocol decisions are made through a DAO, governance is not run by a small group of people, but by a collection of contributors who help steer the protocol in the right direction.”

The first major DeFi application Arkadiko launched is the ability for users to access self-repaying negative interest rate loans. The mechanism works similar to Ethereum’s MakerDAO in which crypto collateral is used to issue a crypto-backed stablecoin. In Arkadiko’s case, users deposit STX tokens as collateral (Bitcoin and USDC are planned as future collateral types) to open a vault that then returns the stablecoin USDA.

Tied to the value of $1, stablecoins are a crucial construct facilitating the exchange of goods and services within the cryptoeconomy. They serve as a medium of exchange that users are willing to spend, unlike cryptoassets like Bitcoin and Ethereum that are expected to appreciate over time. In fact, USDA is already starting to be used as a form of payment.

Arkadiko Vaults offer crypto-backed loans that anyone with an internet connection can access within minutes. The stability fee serves as the annual interest rate users must pay to maintain the loan, which currently is set at 4%. However, unique to the Stacks blockchain, users have the option to leverage Stacks’ Proof of Transfer consensus mechanism in which they can stack the locked STX to earn a yield that is used to pay off the principal and interest of the loan.

The historical stacking yield has averaged ~10% APY, paid in Bitcoin. At the current collateralization ratio of ~400% (or said differently, 25% loan-to-value) and after factoring in the stability fee and stacking rewards, the loan would be fully paid off in approximately three years.

In order to borrow a loan for $100, the user must deposit $400 worth of STX tokens in an Arkadiko vault (approximately 180 STX tokens at the current market price). The vault then issues 100 USDA tokens into the user’s wallet. The STX in the vault is stacked, supporting the stacks’ blockchain consensus mechanism which accrues a Bitcoin yield and pays off the loan’s principal and interest over time.

The user is free to use the USDA for whatever purpose she desires, which may include swapping it for other assets, depositing it in a liquidity provider pool to earn DIKO rewards, accessing other DeFi on Bitcoin applications, or simply paying for goods and services.

Due to the high collateralization ratio of 400%, the system may not be entirely capital efficient, but as new collateral types are introduced and the system becomes more mature, this collateralization ratio would be expected to drop.

Imagine taking out a mortgage or an auto loan that fully pays itself off in a few years’ time. This could potentially be a revolutionary financial primitive that opens up a new means for individuals to access credit, without needing to worry about interest rate sensitivity, consumer creditworthiness, banker bias or discrimination, or central bank monetary policy.

“Proof of Transfer serves as a building block that can be reused in other protocols built on Stacks, such as Arkadiko,” said Philip. “This is exactly what we envisioned when we started building Arkadiko. A stablecoin that earns a yield coming from consensus, without any human intervention. This yield can be provided in a decentralized way without relying on people. Instead it simply relies on a blockchain-native yield where these yields are transparent at any time.”

Yield Farming Campaign Aims To Accelerate User Adoption

To bootstrap liquidity for the protocol, Arkadiko is launching with a generous liquidity mining program (also known as yield farming). The project has launched its native governance token, DIKO, which will be distributed to liquidity providers. 1.5 million DIKO will be emitted through an incentive program in the first six weeks of launch, and emissions will continue at a decaying rate for approximately five years. At the current DIKO market price of $5, this means $7.5 million of rewards will be distributed to liquidity providers in just the first six weeks.

Liquidity providers can earn these rewards by visiting and depositing assets into three possible pools using the Stake feature: DIKO/USDA, STX/USDA, and STX/DIKO. The projected annualized yield for these pools is currently 1830%, 520%, and 1560% respectively. In order to access the USDA required to farm these pools, users can either open a STX-collateralized vault or swap their STX or DIKO tokens for USDA. The STX/USDA pool issues the highest rewards claiming 50% of all the DIKO rewards, and the other two pools claim 20% each. The remaining 10% of DIKO rewards are allocated to the staked DIKO security module, which serves as a backstop to the system. Users must keep in mind these pools are AMM-based and are thus subject to impermanent loss.

Enterprising investors can deploy several different strategies to generate yield. A user may choose to deposit their STX to open a self-repaying Vault, thus receiving USDA equal to 25% of her collateral value. She can then pair the USDA with STX or DIKO to farm the incentives allocated to those pools. Alternatively, she may use Arkadiko’s DEX to swap STX or USDA for DIKO to then deploy DIKO in the staked DIKO security module or pair their DIKO with USDA or STX to farm those pools.

At time of writing, just a few days since the protocol’s launch, over 15 million STX (~$34.5 million) was committed to Arkadiko Vaults. Additionally, users have deposited over $15 million worth of assets into the three liquidity pools, translating to $50 million in total value locked in the protocol. Liquidity mining emissions are currently active and began Tuesday October 26th.

Decentralization May Offer Regulatory Cover and Longevity

Decentralized stablecoins are a crucial financial primitive for any DeFi ecosystem. Recently, centralized projects such as Tether and USDC have come under scrutiny as to their legal status as unregulated financial institutions and their monetary reserves. The CFTC recently fined Tether and Bitfinex $42 million on allegations the USDT stablecoin was not fully backed at all times, and Circle received an investigative subpoena from the SEC to answer the regulator’s questions on the scope of its operations.

Given the impending crackdown, users may trend toward decentralized alternatives that possess greater immunity to regulatory overtures. Arkadiko hopes to tap into Bitcoin’s superior decentralization, security, and censorship resistance to offer unstoppable decentralized financial applications.

By launching the decentralized USDA stablecoin and other DeFi applications, Arkadiko is enhancing the STX token’s capital efficiency and serving as a foundational building block to unlock Bitcoin’s trillion-dollar value.

“The Bitcoin Network is by far the most durable and secure blockchain in the industry,” said Philip. “Along with Stacks smart contracts capabilities, we seek to design and ship products that go beyond just utility, but also empower more users to participate in DeFi in an intuitive and accessible manner.”


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