ALEX 🟧 Advancing Bitcoin DeFi

ALEX aims to provide fixed rate borrowing and lending services with pre-determined maturity in the world of decentralized finance (DeFi). We’ve included forward contracts in our trading pool, with an Automated Market Making (AMM) engine utilizing Generalized Mean. We have formalized the trading practice of swapping forward contracts on the underlying asset, and we’ve incorporated the latest innovation in DeFi — concentrated liquidity. Consequently, liquidity providers on ALEX are able to save significant capital by market making on a selected range of interest rates.

Introduction

ALEX stands for Automated Liquidity EXchange. It is a hybrid of automated market making and on-chain loan-able fund built on Bitcoin via Stacks. While lenders and borrowers can minimize uncertainty by securing loans with fixed rate and tenor, liquidity providers are able to take advantage of our capital efficiency mechanism by imposing a cap and floor on the interest rate. This allows liquidity to be offered on parts of the curve that contains the majority of trading activity and leads to efficient capital management.

On ALEX, lending and borrowing activities are facilitated by a forward contract based token “ayToken”. It is similar to an OTC bilateral forward contract in the conventional financial market, which specifies underlying asset “Token” and expiry date. This paper assumes ayToken is minted and ready to be exchanged. Lenders purchase ayToken at a discount to the spot Token price when the contract is initiated and reclaim the underlying asset upon expiration when forward price converges to spot price. Borrowers sell ayToken in return for Token on day one and return Token upon expiration. The implied interest rate depends on how discounted the forward price is to the spot price at the time of transaction, which is executed on the AMM.

Last but not least, ALEX hopes to bridge the gap between Defi and conventional finance by applying an AMM protocol derived from one of the basic instruments in the fixed income market — the zero coupon bond first proposed by Yield Space. This empowers ALEX to both learn from the fiat world and offer more decentralized financial products in the future.

This paper focuses on technical aspects of the AMM and is the first of a series of ALEX papers unveiling all the exciting features and applications ALEX is developing.