This article examines the Autonomous Rate Manager (ARM), a system built on the Internet Computer Protocol (ICP) designed to automate interest rate management for Liquity V2 loans.
What Is ARM?
As noted, ARM is a decentralized, automated interest rate manager for Liquity V2 loans. It’s like a reliable robot that adjusts selected Liquity V2 interest rates automatically, efficiently, and in a decentralized manner on the Internet Computer Protocol (ICP).
Why Is ARM on ICP?
A reason for being on ICP is that it provides a tamper-proof general purpose compute platform with minimal trust assumptions. Smart contracts on ICP, known as canisters, function as decentralized, stateful serverless services, capable of interacting with web browsers, mobile apps, and other canisters. In addition to high performance, ICP’s blockchain technology stack enables sophisticated DeFi services like ARM.
How to Use ARM
To use ARM, all a borrower has to do is to delegate rate adjustment to an Ethereum smart contract address by using one of Liquity V2’s frontends. ARM then takes care of the rest, taking information from Ethereum, computing necessary adjustments, and optimizing rate adjustment fees and risks. ARM then manages the remaining process, using data from Ethereum to calculate and execute necessary adjustments, while minimizing rate adjustment fees and risks. All of this happens without placing trust in any centralized infrastructure.
Key Benefits of ARM
- Automation: ARM’s intelligent decision-making means it eliminates manual work for the borrower.
- Redemption Risk Mitigation: ARM’s strategy balances interest rates and adjustment frequency, reducing the borrower’s redemption risk.
- Cost Efficiency: ARM applies batch techniques and benefits from ICP’s scalable architecture to keep costs, including gas fees, down.
Trustless and Secure: The borrower’s data and independence are secure, because nobody can change ARM’s behavior. The borrower remains in control of their assets, and they can select other off-chain or onchain rate managers at any time.
Autonomous and Decentralized Interaction between Chains
In addition to ARM’s benefits, ICP technology makes it possible for a borrower to delegate rate management to a canister smart contract with ease, thanks to the following unique features:
- Timer Functionality: This is like a built-in alarm clock for canister smart contracts. Every hour a timer goes off and the canister automatically checks and updates the borrower’s rates, without them having to take any action or activate any other external trigger.
- Ethereum Integration: Canisters can hold and transfer Ethereum assets. Furthermore, full bi-directional interaction between canister smart contracts and Ethereum smart contracts is supported by Chain Fusion technology. This means that the ARM canister can read real-time data like debt, redemption fees, and more from the Liquity V2 contracts on Ethereum and send transactions to Ethereum to adjust rates.
- Reverse Gas Model: ARM takes care of its own gas and operational costs through fee collection and conversion.
According to Yvonne-Anne Pignolet, Director of Research at DFINITY, “timer functionality and Chain Fusion are instrumental in providing autonomy and integrating multiple ecosystems.”
How ARM Features Work
Here is a breakdown of how these features are composed for ARM.
Contract Architecture
The interest management system consists of batch manager contracts on the Ethereum mainnet and an interest rate management canister hosted on the Internet Computer.
Each batch manager contract has a pre-registered externally owned account (EOA) as its owner, which is the only address authorized to perform interest rate adjustments on behalf of the delegating loans.
The EOAs are generated in a safe manner via ICP’s threshold ECDSA signature generation. The threshold ECDSA protocol allows ICP nodes to collaboratively produce signatures on transactions which are verifiable by Ethereum, despite malicious nodes and even under adverse networking conditions. This means that no entity knows the EOA’s private key and only a qualified majority of the ECDSA nodes can collectively sign transactions for the respective address.
Functionality
The ARM canister is triggered by a timer once an hour to check whether the conditions for an interest rate adjustment are satisfied. To this end, the ARM canister fetches data from the Liquity V2 core contracts via Chain Fusion technology.
More precisely, the ARM canister does this via the EVM RPC canister, which is used to communicate between canisters and Ethereum as well as other EVM-compatible blockchains.
The EVM RPC canister sends requests to RPC providers and achieves consensus on their responses to ensure reliable and decentralized interactions with EVM chains on behalf of other canisters. If the rate changing conditions are satisfied, the ARM canister uses the EVM RPC canister to craft an Ethereum transaction, obtain a threshold-signature on the transaction for the respective EOA, and submit the transaction to the Ethereum network.
The ARM canister also has a built-in fault tolerance mechanism that can resubmit transactions that fail.
Sustainability
To cover the cost of the resources consumed to manage a borrower’s interest rate, the batch management contracts charge a fee. A part of this fee is used to maintain a positive EOA ETH balance.
On ICP, each canister has a cycle balance, which is decreased based on the resources a canister uses, in a similar way to a pre-pay model. Users can convert ICP tokens into cycles and send them to any canister.
The ARM canister’s cycle balance also has to be kept above a predefined threshold. To achieve this, a portion of the fees accumulated by the batch management contracts is offered at a discount to anyone who replenishes the ARM canister with cycles in exchange for ETH.
With this mechanism, the fees collected replenish the balances needed on both Ethereum and ICP in a permissionless, sustainable, and autonomous manner.
