Introduction
In our engagement with Avantis, we focused on developing a robust tranche architecture for their synthetic decentralized perpetual leveraged trading platform.
Avantis enables traders to long or short synthetic crypto, forex, and commodities with low fees, self-custodial trading, and zero-slippage execution, all while relying on liquidity providers (LPs) to underpin the system.
Our work centers on using game theory and quantitative analysis to optimize the allocation of rewards and losses between LP risk tranches, ensuring that even in profitable trading environments, LPs' principal is safeguarded.
This engagement will establish a dynamic, rebalancing framework that incentivizes optimal liquidity distribution across senior and junior tranches.
Scope
- Tranche Architecture Design: Analyze and refine the current tranche structure—comprising a low-risk senior tranche and a higher-risk junior tranche—to determine the optimal balance between fee allocation (40/60 split) and loss sharing for LPs.
- Dynamic Rebalancing Mechanism: Develop and implement a dynamic mechanism to rebalance liquidity between the tranches. This includes designing yield multipliers for the junior pool to incentivize deposits and adjust allocations when TVL deviates from the target ratio.
- Game Theory & Incentive Analysis: Leverage game theory to evaluate LP behavior under various risk preferences, ensuring that the reward structure aligns with the protocol’s overall liquidity needs and risk management goals.
- Comparative Analysis: Benchmark Avantis’ tranche design against competitor perpetual protocols to understand LP revenue and risk dynamics, and incorporate best practices into our final recommendations.
- Implementation Roadmap: Provide a clear outline of the proposed tranche balance, fee/reward allocations, rebalancing protocols, and any necessary operational constraints (e.g., time locks), along with a timeline and pricing framework for the engagement.
Audit Date: 2023-05-15
Type: Economic Audit