📊ALMM
Learn more about the Active Liquidity Management Module (ALMM).
BitU Protocol employs the ALMM to optimize yield and liquidity, while maintaining the highest standards of safety and transparency through partnerships with leading auditors and custody providers. The ALMM leverages off-chain liquidity and transaction efficiency to generate higher yield for on-chain funds.
The Interest Rage Gap
The disparity between on-chain and off-chain infrastructures influences the users' use case scenarios and trading behaviors, affecting asset demand and interest rates.
We've noted varying interest rate patterns for different assets. For stablecoins like USDT and USDC, off-chain (centralized exchanges..etc) interest rates are usually higher than on-chain rates.
In contrast, ETH interest rates on the Ethereum network surpass those off-chain. We reference Binance exchange's lending rates for off-chain scenarios and AAVE's rates for on-chain scenarios in the subsequent graphs.
For USDT, the interest rate on Binance is notably higher than on AAVE, particularly evident during periods of higher rates. Most traders/hedge funds primarily trade on centralized exchanges, where borrowing rates increase more significantly when the market is active and the demand for funds rises.
The same trend is observed for another stablecoin, USDC.
USDC's borrowing rate on Binance has averaged around 11.9% over the past year, compared to only 4.59% on AAVE.
Bitcoin also exhibits a similar trend, although the gap is not as pronounced. But we're expecting Bitcoin to follow a similar trend of ETH as the BitcoinFi ecosystem grows.
Bridging the On-Chain and Off-Chain Interest Rate Gap
Why do many users and funds hesitate to keep their assets on exchanges, even when they offer higher interest rates?
The core concern here is security. The advantage of using on-chain protocols lies in the transparency of funds held on-chain, visible to users at all times within smart contracts. Unless there's a smart contract hack, user funds are considered secure.
However, to access off-chain yields, users must deposit funds on exchanges, introducing centralized risks. Events like the FTX crash have made many users wary of centralized institutions. Consequently, despite the allure of higher returns, many users opt for what they perceive as safer options and forego higher yields.
So, if we address the issue of fund security and transparency, users can confidently place their funds where returns are higher.
How does BitU Protocol solve this?
ALMM introduces the involvement of trusted custodial entities.
User funds are securely held in trusted custody entities, avoiding exchanges, and not under the direct control of the BitU protocol itself. Custodial entities regularly disclose transparency and security reports, ensuring the safety of user funds.
These funds are then mapped onto exchanges, where ALMM's yield module utilizes them to generate returns. Ultimately, the profits are shared to users.
Of course, the focus here has been on ALMM's yield module. Apart from this, ALMM also includes liquidity management, risk control, and other modules.
Ensuring the security of user collateral by ensuring that it is safely held in trusted custodial institutions.
Collecting income generated from mirrored assets on exchanges and converting all income into USDT, which is then stored in the custodial address. Additionally, using the earned USDT as collateral, new $BITU tokens are minted and distributed to $sBITU holders.
Providing initial liquidity for $BITU within the ecosystem.
Risk management and portfolio liquidation: ALMM monitors user positions and ensures that the overall leverage ratio of the protocol remains above the safety threshold.
Redemption of $BITU and collateral assets: ALMM handles the redemption of $BITU tokens and the release of collateral assets.
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