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Introducing Origin’s Automated Redemption Manager (ARM)

April 4, 2024

Introducing the Automated Redemption Manager

This week, the Origin core team put forth a governance proposal to merge OGN and OGV in an effort to consolidate governance and economic rights behind a single token. We are committed to building permissionless DeFi protocols that will enable open finance, starting with yield-generating tokens like OETH, primeETH, and OUSD. Collectively, our existing products span the LST, LRT, and yield aggregator categories.

Today we are announcing an early-stage experimental product, the Automated Redemption Manager (ARM). The Automated Redemption Manager is designed to allow for zero slippage swapping for redeemable assets, starting with LSTs. You can think of the ARM as a cross between an AMM and an isolated money market. 

Unlike a DEX that uses a bonding curve to price assets, ARM prices are determined by the current market rates of the underlying collateral and the length of the redemption queue. Protocol revenues generated by the ARM will accrue value to OGN.

We quietly launched an alpha version of this product on Ethereum Mainnet recently. Early results are highly promising, with over $100M of trading volume occurring on just a single pool. While it is still early, we are hopeful that the ARM can mature into a powerful new DeFi primitive this year.

The Problem

Imagine if you went to the bank and asked to withdraw $100. Your banker tells you they can either give you $99 today or debit your account for $100 today but only let you pick up the cash in a few days. That’s essentially how LSTs work today.

While you can instantly mint OETH or other LSTs with ETH, redemptions oftentimes take one unstaking epoch (27 hours) and can extend to multiple days during times of high market volatility. Users wishing to exit LSTs must either wait for the unstaking period to get back out to ETH at a 1:1 ratio or swap into ETH at a loss. 

This is due to the fact that AMMs charge trading fees and because most LSTs trade slightly below peg to account for the time value of money. LSTs that permanently trade below peg essentially have a hidden exit fee. As an example, frxETH consistently trades ~0.25% below peg. This means you need to stake frxETH for around 3 weeks to break even with the yield earned through staking. This tradeoff might be tolerable for individuals who are okay being long-term holders, but it’s completely unacceptable for protocols wanting to rehypothecate their users’ funds for additional yield.

There are billions of dollars worth of ETH sitting idle on bridges, DEXs, and all over DeFi.  The only way any of these protocols can reasonably rehypothecate these funds is if they have a credible way of returning 100% of those funds whenever their users ask for them back. Just like a bank doesn’t keep 100% of the funds on hand at all times, it is neither possible nor necessary to offer instant redemptions for the full amount of capital being staked. You just need enough exit liquidity to handle typical withdrawals.

Ensuring instant exit liquidity for LSTs

Today’s AMMs mostly rely on pricing assets through bonding curves. When an asset is sold into a typical AMM pool, the supply of that asset increases and pushes the price down on a bonding curve. When the asset is bought, supply in the pool diminishes and the price is pushed up.

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The ARM can be thought of as an AMM that prices assets without a bonding curve. Instead, because the focus is on redeemable assets like LSTs (redeemable for ETH), pricing is determined by the time value of money of “borrowing” ETH. Pricing can be benchmarked against the lending rate on popular money markets such as Aave. In the case of OETH, the fees can even be set to free to create a powerful differentiator and incentivize more adoption.

As a concrete example, imagine that a user wants to swap out of stETH into ETH. That user can currently unstake from Lido and receive ETH 1:1, usually after several days. Or, they can swap stETH instantly for ETH on Curve or Uniswap, incurring transaction fees and slippage. For larger swaps, the slippage can be considerable, penalizing the trader for wanting to get out of a large position.

With the ARM, traders will get a far more competitive price at virtually 1:1 between stETH and ETH. The ARM can quote these prices based on the the cost of “loaning” out ETH to the trader at a very low interest rate. In practice, this almost always beats the pricing of AMMs like Uniswap, Curve, etc. Further, gas optimizations and an intentionally modest trading fee in the ARM ensure the best possible prices for traders looking for instant exit liquidity.

Our vision for OETH is for it to become the most trusted money lego for those seeking to earn yield on their ETH. Our thesis is that having a perfect peg and strong guarantees around instant redemptions will be critical features for other protocols that are looking for a way to put their idle capital to work. On a broader level, we believe that ARMs can serve as third-party, decentralized peg-keepers for popular LSTs and LRTs in the future. The entire industry will benefit from lower-loss redemptions between derivative tokens and ETH.

Early results

We first deployed the ARM as a small experiment 3 months ago. Despite not even having a frontend UI or any public marketing, over $100M of trading volume was quietly generated on a single stETH/ETH pool.

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DEX aggregators like 1inch and CoWSwap have already integrated with our ARM smart contracts. We’ve heard from top CoWSwap solvers like Barter that there is strong demand for our novel instant liquidity redemption pools, and early traction proves this thesis out with the ARM outcompeting traditional AMMs for a significant number of trades. The entirety of our trading volume is currently coming silently from these DEX aggregators and MEV bot operators. Further, the ARM is extremely capital efficient with a Liquidity Turnover Ratio (LTR) of 0.56.

The LTR is a measurement of how much daily trading volume occurs relative to a given amount of liquidity. For comparison, Curve is one of the top AMMs for ETH/LST pairs, but it’s global capital liquidity turnover ratio for Q1 2024 was 0.103 according to DeFiLlama. This means that the Origin ARM is 5.4x more capital efficient, indicating that future LPs will also get higher trading fee APYs for supplying liquidity. Origin started as the only liquidity provider and has already earned 9% APY on the ARM because of this high capital efficiency.

What’s next

We are getting ready to launch more pools and to open up to external LPs. We will be prioritizing Origin assets, starting with OETH, but also increasing the surface area of LSTs and LRTs supported over time based on market demand.

If results continue to be compelling, we will expand the offering as a full-blown complementary product to OETH and our other yield-generating tokens. In the future, the protocol could be used for any type of redeemable asset. It has vast potential applications across a variety of verticals, potentially even spanning the world of real world assets and stablecoins.

Our long-term vision is to take our Automated Redemption Manager multi-chain, enabling seamless cross-chain transfers for redeemable assets.

Josh Fraser
Josh Fraser
Origin
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