The Malt Protocol extends the liquidity pool using capital controlled by the protocol. This capital can be deployed by the protocol to ensure stability.
Rewards are paid in DAI instead of Malt. This can be thought of as the protocol realizing profit for you. Controlling profit taking at the protocol level is extremely powerful.
There are no debt expiring coupons. Instead Malt introduces arbitrage auctions. Think of it like a juiced up swing trade with a guaranteed limit execution at peg.
Malt is the new generation of algorithmic stablecoins. As a speculator you can make money by staking Malt liquidity provider tokens and earning yield or by purchasing arbitrage tokens in an auction when the price of Malt falls below peg.
Malt’s focus is building a system of incentives up from first principals. Instead of trying to stop or slow down speculator behaviour with arbitrary reward lockups or taxations, Malt puts the speculator first and makes it as easy as possible to speculate on the protocol while minimizing investor risk. By aligning the incentives of a speculator with the protocol itself, everyone can win.
Every liquidity pool in the Malt ecosystem gets its own stabilizer node. This stabilizer node is in charge of taking actions to keep price stable. This includes minting and selling Malt as well as triggering arbitrage auctions.
Liquidity extension is capital that is owned and controlled by a stabilizer node. It is capital that is actively used by the stabilizer node to help stabilize the price and lives outside of the main liquidity pool but will be automatically deployed in response to market changes.
When the price of Malt is above peg, the stabilizer node will mint Malt and sell it directly into the liquidity pool to drop the price. This sale generates profit, some of which is retained by the stabilizer node as liquidity extension and the rest is immediately distributed as rewards to bonded LPs.
The stabilizer node is continuously growing its liquidity extension in times of growing demand. When the price drops below peg the stabilizer node uses its liquidity extension to buy back and burn Malt to contract supply and therefore increase the price back to peg.
The amount of Malt purchased and burned is dynamic and will be influenced by distance from peg, amount of auction participation, and how frequently the price diverges from peg.
This usage of the liquidity extension to buy and burn Malt is how the protocol ensures a meaningful supply contraction when price falls below peg, even when accounting for premiums paid to auction participants.
Most farmable stablecoins pay rewards in the protocol’s native token. The problem with this is speculators will then need to sell the tokens to realise profit. Those profit-taking flows are often beneficial because they bring the price back down to peg. Unfortunately, there are also times where that profit taking is undesirable and drives price below peg.
Malt understands that speculators are motivated by realising profits, so we decided to just control the profit taking flows at the protocol level and pay speculators in the token they desire anyway. Everyone wins - the protocol remains stable and the speculators get paid in the token they want.
Yes! The rewards are paid in DAI right now because the only liquidity pool that we will support at launch is Malt/DAI.
In the future rewards for staking LP tokens will be paid in the “Other” token in a Malt/Other pairing. So you are free to choose which token to be paid in by providing liquidity to the pool with the token you want.
This naturally incentivizes more liquidity in the most desirable Malt trading pairs and greater liquidity leads to greater stability.
When the price of Malt in a particular liquidity pool falls below peg it will trigger an arbitrage auction for that pool. This is a Dutch-style auction that will start around $1 and will steadily drop over the course of 30 minutes. The auction ends as soon as either the time is up or a predetermined amount of money is pledged to the auction.
At any point anyone can pledge to the auction. Pledges are always in the “Other” token in the Malt/Other pool. In return for the money pledged the user will receive arbitrage tokens. Everyone who pledges to the auction will pay the same price regardless of when they bid - that price being whatever the price is when the auction ends. Because the price is always dropping you are guaranteed to get at least the price of the auction at the time you bid.
Each arbitrage token will automatically be redeemed for you by the protocol into the “Other” token at an equivalent value of $1 per token. This will happen when the pool’s stabilizer node has enough capital to cover the redemptions. The redemption happens automatically to avoid any issues with bots frontrunning the claiming of the tokens.
The tokens purchased in an arbitrage auction will never expire and will be redeemed in a first-in, first-out scheme (older auctions get covered before new ones, but each auction has tokens covered pro-rata; when 10% of tokens can be covered each user has 10% of their tokens redeemed).
You can think of the arbitrage auction like a swing trade back to peg where the trader gets an additional premium to incentivize the trade and the protocol will execute their exit when it reaches peg.
A typical arbitrage is a risk free trade that locks in a price discrepancy across exchanges or across correlated assets. The Malt auction is an arbitrage across time (the price is lower than its fair value peg price and should return to peg). But this is not risk free like a typical arbitrage opportunity as there is an opportunity cost of holding the arbitrage tokens until they are redeemed.
Malt allows the market to decide the premium for holding this risk. As the auction price drops, it creates a gap between the auction price and the market price of Malt. That difference represents a premium above simply buying Malt at market price and swing trading it back to peg. Taking such a swing trade also doesn’t guarantee a good exit at peg as bot-driven frontrunning risk exists.
The arbitrage auction allows buyers to take that swing trade back to peg with an additional premium and an exit fill at peg.
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