Malt Update 1

Published in

Malt Protocol

6 min readJul 6, 2023

The first full week of Malt is drawing to a close. While the launch may not have been explosive we could not have asked for the mechanism to have worked any better. We have achieved our immediate goal of creating a stablecoin that can increase its own collateral by arbitraging its own peg. This is only the beginning and we have many plans coming down the pipeline.

TLDR

Malt is working great so far
106 auctions have occurred and 12k Arb Tokens purchased
These auctions along with the work of the Swing Trader have taken the collateral in the system from a low of 98.5% up to 99.43%.
We are working on a “zap” function that also routes swaps through a Swing Trader OTC contract where Malt that the Swing Trader has previously purchased can be bought from the Swing Trader at $1 — Zero slippage execution for swaps and profit realisation for the Swing Trader.
We have started work on the ETH pool arbitrage system. This will increase volume (and thus yield) on Malt pairs via arbitrage against the ETH price. This will pave the way to further pools like WBTC.
Malt upkeep incentives have been removed or drastically decreased. Instead, the team will be paying for the upkeep to avoid supply inflation.

This post will discuss some of the things we have learned in the week since launch and how those learnings are being used to ensure our roadmap maximally aligns with the progression of the protocol. Some of that is bringing things from our roadmap forward as they are clearly higher priority than originally thought while others are new ideas we are playing with.

As we have already said, the mechanism is working unbelievably well so far and has been steadily increasing its collateral over the course of the last week. This is amazing to see but we are not resting on that. Our focus is to the future and how we can continue to improve and grow the protocol. There are still many things to improve and new things to create!

The two core roadblocks that lie in front of us:

Increasing volume to stimulate yield and grow the runway
Increasing liquidity to allow larger size to enter Malt.

TVL, APR and collateral data at time of writing

ETH pool

Allowing people to earn yield on their ETH/LSDs has always been a big goal of ours. However, in the last week we have realised the importance of offering this sooner rather than later as yield on ETH is more desirable than yield on stables for many crypto natives.

An additional benefit that falls out of supporting ETH pools is we can begin to roll out arbitrage against other ETH pools on other dexes. For example using Malt/DAI, Malt/ETH and UniV3 ETH/DAI to find triangulated arbitrage opportunities. This opens up the door for Malt to start producing yield as the price of ETH fluctuates instead of waiting for direct activity on Malt to produce the yield. The triangulation through the Malt/DAI pool also naturally starts to stimulate volume on that pool which can activate the stabilization tools on Malt/DAI generating some yield on that pool as well.

This is an early example of the separately stabilized pools being able to communicate information between themselves via arbitrage. Each pool is a simple closed system of supply and demand to stabilize, with no context of the outside world. Then arbitrage between pools allows global shifts in supply and demand to diffuse across all of the pools which then all get stabilized.

By providing a way to arbitrage against the price movement of ETH we have a way to immediately inject a constant stream of volume into the Malt pools — thus taking steps towards overcoming the hurdle of stimulating yield.

We have already started building this arbitrage system with some tricks to try to give the protocol an edge over other on-chain arbitrageurs. Our goal is to get something up and running in the next few weeks.

Swing Trader OTC + Zap

The second roadblock is the lack of liquidity being prohibitive to accounts who want to get in for size. The arbitrage system mentioned above will go some way to organically helping this as the increase in volume may increase yield and runway and thus making Malt more attractive and bringing in liquidity organically. Additionally, as we start to partner with other protocols and branch out our web, the liquidity will enter organically.

We also want to take some more direct action right now to help with allowing larger size to enter Malt. This is why we are building a system to allow wallets to purchase Malt off the Swing Trader for $1. You can think of this as a permissionless OTC trade with the Swing Trader. The Swing Trader may not always have Malt available but when it does anyone can purchase it for $1 per Malt.

This will then be integrated into a new “zap” UI that we are working on as well. This will allow you to go from any supported asset into Malt or fully into bonded Malt/DAI LP with a single click. The interesting part is that this zap will also route the swaps through the Swing Trader OTC system. Because the Swing Trader always sells at $1 any size filled using this OTC channel does not get slipped.

This means that if the Swing Trader holds any Malt when you use the zap you will get a better price execution than you would have otherwise got on any Dex or Aggregator.

The benefit to the protocol is we simulate additional market depth by filling against the Swing Trader. At the time of writing the Swing Trader holds about 75k Malt while the liquidity on the dex is around $300k. Using this OTC channel would allow 75k of volume to enter and have 0 slippage, despite only $300k of liquidity.

An additional benefit to the protocol is it allows the Swing Trader to realise profit sooner. All of the Malt held by the Swing Trader is there because it was previously purchased at some price less than $1. Concretely, the 75k Malt held by the Swing Trader right now was purchased at an average price of $0.981. If all 75k Malt gets purchased then the Swing Trader immediately realises the 1.9% profit without needing to wait for the AMM to move away from peg enough to trigger stabilization. Thus also completely removing the risk of frontrunning/sandwiching extracting value from the Swing Trader.

This realised profit is split between increasing collateral and paying yield. In the concrete example above if the protocol sold all of its 75k Malt it would realise ~$1300 profit. This is the engine that drives the protocol forward. The Swing Trader acts slowly and methodically but extracts profit from the market as it goes. Allowing this permissionless OTC deal with the Swing Trader just increases the speed at which this engine can carry out a full round-trip profit cycle.

Malt Upkeep Incentives

We have also made some changes to the Malt incentives paid to users who help upkeep the on-chain system. These upkeep tasks cost the protocol a fixed amount of Malt per year to run. However, given the current market cap of the coin, this fixed cost represents an inflation to the supply that will undermine the collateral in the system.

For this reason, we have decided to set most Malt incentives to 0 and significantly reduce the remaining ones. In their place will be an upkeep bot that the team will run so we can cover the costs instead of requiring the supply to inflate to cover them.

That is all for this week’s update. We look forward to updating you again next week!

Onwards and upwards Malty fam!