Introducing KeeperDAO, an on-chain liquidity underwriter

We’re introducing KeeperDAO, an on-chain liquidity underwriter for decentralized finance, built on top of the Ethereum blockchain.

Intro

Decentralized finance (“DeFi”) has grown significantly over the last year with over $400m USD equivalent of Ether locked in smart contracts, facilitating the creation of non-custodial borrow/lend markets, margin trading exchanges and other financial applications on top of Ethereum. The purpose of this collateral is to provide users with the ability to employ leverage while margin trading (e.g. dYdX, DDEX) and borrow/lend crypto in a risk-minimized fashion (e.g. dYdX, Compound, MakerDAO). As with any leveraged financial application, there needs to exist a mechanism to liquidate under-collateralized positions to ensure solvency.

KeeperDAO is a protocol that economically incentivizes pooled participation in ‘keeper’ strategies which manage liquidations and rebalances on applications spanning margin trading, lending and exchange. This allows participants to earn passive income in a game-theory-optimal fashion whilst ensuring decentralized finance applications remain liquid and orderly.

Overview

At a high level, KeeperDAO enables users to pool capital into Ethereum smart contracts to collectively profit from on-chain arbitrage and liquidation opportunities. Capital staked in these pools, such as USDC and DAI, is then used to exploit on-chain profit opportunities presented by protocols such as Compound, dYdX, MakerDAO and DDEX. These opportunities are not always present and occur often in times of high volatility. To mitigate having a large pool of capital being underutilized, all assets held by the liquidity pool are also constantly loaned out on markets such as Compound and dYdX.

KeeperDAO is maintained by a network of off-chain bots, who constantly watch the Ethereum mempool for opportunities and if found, will initiate an Ethereum transaction to participate in a Priority Gas Auction (PGA), competitively bidding up transaction fees in order to obtain priority ordering within Ethereum blocks. When KeeperDAO wins a PGA, funds are rebalanced through an on-chain rebalancer network.

PGAs and pooled liquidity

In their paper, “Flash Boys 2.0: Frontrunning, Transaction Reordering, and Consensus Instability in Decentralised Exchanges”, Philip Daian et al. show that the Nash equilibrium for price gas auctions is collaborative, not competitive, and that promising strategies to encourage long-term collaboration do not necessarily need explicit coordination. KeeperDAO embraces and extends these findings to ensure that joining the KeeperDAO protocol, instead of competing with it, is the game theory optimal strategy: having a large liquidity pool, and implementing a “grim triggering” strategy.

By having a large pool of liquidity, KeeperDAO is able to capture opportunities much larger than what could be captured by individuals. Liquidators will always be able to get a share of larger opportunities by using the KeeperDAO liquidity pool, opportunities that they could not necessarily capture by themselves. It also has the added advantage that contributors to the KeeperDAO liquidity pool do not have to run their own infrastructure, bots and priority gas auction strategies, making the barrier to entry much lower.

Let’s build the largest on-chain liquidity pool together

We’re excited to make KeeperDAO the largest on-chain liquidity pool to support the entire DeFi ecosystem.

If you’d like to stay updated, follow KeeperDAO on Twitter or email us at hello@keeperdao.com.

KeeperDAO is a joint project between Talo and Amber Group.