Background and business opportunity
One of the central innovations introduced by decentralized finance (DeFi) is fully automated money markets with low trust requirements, accessible by arbitrary parties. Capital deployment into collateralized debt products or automated non-custodial market-making (AMM) is becoming streamlined, with the lowest historical barriers for entry, both in the sense of compliance and minimal viable investment amounts. The established industry term for this group of mechanisms is liquidity provision (LP).
The second generation of DeFi brought forth two further innovations:
• Token incentives for liquidity provision (“yield farming”), and
• Margin trading and leveraged positions.
Alf Protocol is a step towards third-generation DeFi, offering leverage for liquidity providers in AMMs on the Solana blockchain.
At the core lies the protocol for leveraged liquidity provision into AMMs and yield farming.
Complementary to that, Alf Protocol offers two protocols for unleveraged liquidity management:
AlfMM (a decentralized exchange service) and AAlf (an overcollateralized borrowing service). The
the core purpose of both protocols is to provide entry points for traders and risk-averse investors,
offering them a platform to trade and provide liquidity, all the while reining in an additional
revenue from indirectly providing liquidity to the Leverage Protocol.
Vision of the solution
Alf Protocol is a protocol for capital deployment on Solana for the purposes of liquidity provision and yield farming, both with and without a margin of up to 200x. The protocol introduces its own versions of an invariant-based Automated Market Maker protocol for exchange operations and a money market for short-term loans. The central contribution to the Solana ecosystem is a protocol for leveraged LP positions in AMM pools and yield farming protocols. The protocol improves capital efficiency and facilitates more liquid markets by connecting low-risk, low-effort investors providing liquidity to lending protocols with risk-seeking, active management investors who focus on leveraged liquidity provision and yield farming positions. Alf Protocol aims to become the go-to place for blockchain liquidity, initially launching on Solana and then potentially expanding to other chains. Alf is a family of protocols connecting traders and investors of varying risk appetites to facilitate liquidity flows and maximize capital efficiency for all
The protocol will be an interesting tool for risk-averse investors to use their capital to follow a target of principal-protected yield (can be low) by providing capital into the AMM pools. Whereas risk-seeking investors will be able to use their capital to gain maximal yield (by taking risks) by providing liquidity into (external) AMMs with leverage borrowed.
For borrowers who will be able to use collateral thanks to the access to liquidity, there will be an opportunity to borrow from the lending pools. Additionally, arbitrageurs will also use their automation skills, short-term capital access to perform liquidations in order to earn assets by facilitating market efficiency.