Introduction, The LLF as a New Primitive

At its core, the Limitless protocol democratizes access to leverage for any digital asset.

Before it could set out on that mission, Limitless Labs was forced to build upon all of the hard learnings of all the giants that came before it in the wild-wild-west of DeFi.

It was clear that a new primitive, a hyperstructure of sorts, was necessitated. This led to the genesis and creation of a new design, namely, the fusion of a Concentrated Liquidity AMM and Lending Facility into one architecture. And thus, the Limitless Leverage Facility (LLF) was borne.

The LLF, complex yet elegant in architecture, enables the amalgamation of features that were previously not thought possible.

In order to understand, let’s first outline the four major problems in DeFi, and then tackle each of these systematically.

• Oracle and Governance Dependency

• Liquidations

• Liquidty Fragmentation

• Impermanent Loss / LVR / Divergance Loss

Problem 01: Oracle and Governance Dependency

Asset valuation and re-valuation form the cornerstone of all financial products, and most DeFi products use oracles for this task. However, the alleged sources of truth do not scale for every asset, as we explain below.

Oracle-based attacks are simple and ubiquitous

The reliance on ‘somebody’ for pricing information significantly augments the surface of plausible attacks. An oracle with outdated or malicious content can disrupt all connected processes, leading to unwarranted liquidations or malicious arbitrage trades.

An oracle manipulation is, at its crux, a rather simple two-step attack:

1. The first step is to manipulate the price source, usually a DeFi protocol, to artificially inflate a token’s price by swapping/buying a vast amount of it.

2. The second step is to go to a liquidity pool connected to said price oracle and open an under-collateralized position that will allow him to fly away with the excess money.

Another attack is frontrunning oracle updates, where informed traders take advantage of oracle latency to front-run the price update and trade against lagging prices. Anyone would want to trade after peeking a few seconds into the future.

And lest we not forget, LPs, the counterparties to all this toxicity, obviously incur massive losses. Most oracle-based exploits are some variation of these schemes and attacks of this flavor have cost the industry billions. It is one of the largest, if not the largest, cause of exploits in DeFi protocols.

Oracles hinder financial innovation

While oracles often work for assets with ample liquidity and significant Lindy, this only accounts for a small fraction of all cryptocurrencies. Smaller coins are extremely vulnerable to price manipulation at the primary liquidity venue, making oracles that report their value unreliable. Consequently, protocols are left without a dependable means to continuously price the vast majority of coins, significantly hindering the development of new products.

Even for larger assets, unforeseen events such as network congestion or extreme volatility (e.g., the Luna death spiral) can enable malicious actors to drain pools, exploiting lagged oracles.

Game theory: Oracles foster economic misalignment

Let’s talk about oracles through the lens of game theory, or incentive compatibility. A mechanism is incentive-compatible (IC) if every participant can achieve the best outcome for themselves just by acting according to their true beliefs. IC is important in interactions in which at least one participant does not know perfectly what another participant knows or does(such as price data providers vs data consumers). Always remind yourselves: if a system is not IC, there is always room for exploitation.

• Example: If an insurance company offers a discount to people who do not engage in high-risk behaviors, such as smoking and skydiving, then persons who engage in those behaviors have an incentive to identify themselves as low-risk, exploiting the information asymmetry within the system. Whereas an incentive-compatible solution should ensure that people who engage in high-risk behaviors identify themselves as such.

Valuations using oracles can never be fully incentive compatible. If an economical rational agent (exploiter) has superior information regarding the fair value of the asset he is pricing, an outcome that maximizes his profitability is not going to be simply telling you what the fair value of the asset is. In most cases, he would have the incentive to lie, and somehow game the derivative transaction.

Conversely, a mechanism that employs a market-driven pricing mechanism, where the best profitable outcome for these agents is artificially crafted to result in a profitable arbitrage, would align incentives between the informed and those who are not. This is because an arbitrageur’s profit is positive only if the priced asset is not on par with the fair value(prices quoted from all other venues). The informed will be acting in accordance with their true beliefs(by taking the arbitrage trade), mechanism thereby satisfying the above definition of IC.

Spoiler: This is precisely the mechanism adopted by Limitless.

But ser we tried…

How?

1. Teams created their own oracles, which are highly centralized, anti-trustless and anti-permissionless.

2. Teams manually fine-tuned parameters through governance, aiming to lessen the impact of potential exploits in proportion to each asset's associated risk.

3. Teams did not list tokens with unreliable oracles.

4. Teams turned a blind eye to the root problem, just used oracles to price shitcoins, and placed dollars at significant risk.

We need to conceive a system that can price assets without introducing new risks with any off-chain dependencies. As the tokenization of diverse assets(RWA, friend.tech, or even fungible labor markets) becomes commonplace, the demand for a system that offers leverage for every asset on-chain will become paramount.

What Uniswap did for on-chain trading(trade anything), an oracle-free protocol can do for leverage(long/short/lend against anything).

Problem 02: Liquidations

Liquidation is a bug, not a feature.

The problems associated with forced liquidations are closely intertwined with the oracle dependency problem. They are arguably the worst UX of leverage-based products -- yes, it’s a UX problem that can and should be solved. Most likely you are forced to sell your collateral at the bottom. And nobody wants to sell the bottom, only for the price to rebound shortly after.

But it doesn't end there. To account for slippage/congestion during liquidations, the trigger price is often much higher than the fair liquidation price. This 'liquidation fee' 'insurance fund’, ‘penalty’, or whatever you want to call it, is subsidized by borrowers and leverage traders, resulting in value lost from the system and making high leverage very costly. This means not only are you forced to sell your collateral, but you are forced to sell them at a lower price than the current fair market price.

This penalty system, meant to insure against worst-case liquidity scenarios, can also be exploited by malicious parties to forcefully liquidate positions, causing so-called scam-wicks.

Insolvency and Bad Debt Risk

Liquidations sometimes fail. To counteract failed liquidations and prevent bad debt, DeFi protocols are forced to

1. Not list certain assets, knowing that it could be either A). susceptible to oracle risk, or B) too illiquid for liquidations

2. Assume normal market conditions. However, this normality does not hold during black-swan events i.e Black-Hat attacks, Black Thursday, Death Spirals, etc.

3. Introduce opaque risk parameters, complexity, and centralization into the equation.

For instance, take a look at this table of AAVE lending market parameters. The sole purpose of all of these DAO-governed parameters is to mitigate bad debt risk from failed liquidations, while not sacrificing too much yield.

Yet these parameters pose several concerns:

• All these parameters add extra system complexity, leaving room for human error.

• Why should every participant of the protocol adhere to a single risk-reward profile? The pooled model is archaic.

• No set of parameters is always optimal under all market conditions, so they need to be constantly fine-tuned, which is stymied by DAO bureaucracy. But they are ‘supposed’ to be resilient under most market conditions so some of the parameters can be very stringent.

  • For example, under a system governed by those parameters, someone borrowing against their LDO will be liquidated when the value of the borrowed asset reaches only 50% of the collateral’s value, with the penalty being a whopping 9%! This means with 100 USD worth of LDO you can only borrow a max of 40 USD, after which if the price of LDO drops merely by 10% you will be liquidated, with MEV stealing away 10 USD.

  • Even for a large asset like ETH, the threshold for liquidations is 83%, with the penalty being 5%. If you try to use this liquidity to leverage long ETH, you’d be liquidated with a 5% penalty on your entire position when the leverage coefficient reaches a mere 100/(100-83) = 5.88x.

Invert

Many of the short-comings described were more or less illustrated most recently with Michael Egorov’s debt position in Aave, Frax-Lend, Abracradaba, and Inverse Finance. If the position was actually liquidated as the system was programmed, CRV would be down 90%+ before even 10% of his loan can be repaid.

The solution is to invert.

Or in other words, seek to render the concept of bad-debt null and eliminate liquidations all together. By letting lenders be responsible for their own loan’s parameterization, it would then logically follow that **protocols become incapable of insolvency.

Problem 03. Liquidity Fragmentation

DeFi also grapples with liquidity fragmentation between tradable and lendable liquidity. A unified liquidity hub for trading and lending would make markets more efficient.

Let’s elucidate.

Right now when a trader wants to trade he will go swap against an AMM, and when a borrower wants to borrow he will lend from a lending pool. The reader may ask, seems like a common practice, what is the problem? Well, this fragments liquidity between what's available for trading and what can be lent out. This division is characteristic of passive liquidity provision; an active liquidity provider would instead promptly deploy his capital into whichever investment has the highest EV.

Fragmented Liquidity is expensive

This form of fragmentation makes it more expensive to access liquidity for both traders and borrowers. With liquidity being more scarce in a single liquidity venue, a trader would pay more in slippage, and a borrower would pay more interest(or simply might not be able to borrow at all). This is particularly true for long-tail assets, where liquidity is generally hard to source.

What we need is a system that unifies tradable with lendable liquidity and lowers the cost for everyone.

Such a system can handle defaults with grace, as it does not rely on external liquidity sources for liquidations. At the liquidation price, the lender simply becomes the LP, so every loan’s solvency would be guaranteed at origination.

Unlike lending pools, this allows the lender to customize his lending strategy and express a preference over collaterals. Lenders can choose to lend at ticks closer to current market prices for more yield, and vice versa, in exchange for a higher probability of buying the collateral (yield-bearing limit orders).

Problem 04. Impermanent Loss / LVR / Divergence Loss

IL, LVR, DL, etc are all ‘losses’ of the same flavor; they are the relative loss of a constant dollar-cost-averaging strategy enforced by the AMM versus not buying or selling at the current price. Now mitigating IL, or increasing LP profitability, is considered the holy grail of AMM innovation, and Limitless is surely not the first to claim to do so. For context here are some paths explored by the industry:

1. Oracles

   The (oversimplified) idea is, if we just have somebody tell the AMM what the prices are, then the AMM won’t have to pay (in IL) arbitrageurs to align prices. However, not only does this model inherit all the drawbacks outlined above, it also introduces significant counterparty risk for LPs i.e savvy traders draining pools.

2. Active Liquidity Provision: More work for more alpha

   Active market-making requires, well, active management. This closes the door for LPing, a product with high demand, for most retail. i.e CEX on chain (orderbooks/RFQs/etc), Hedging using perps/options

3. Let’s just make the best AMM

   By and large, this seems to be the industry's inclination; if we create a very good, gas-efficient, and dominant AMM, we will attract more (uninformed)traders besides just arbitrageurs. This will increase trading fees without increasing IL.

Enter Concentrated Liquidity

Uniswap v3 introduced non-fungible liquidity positions, allowing liquidity providers (LPs) to concentrate liquidity within specific ranges. Its upgrade from UniV2 was surely marked by innovation, yet in terms of yield generation, it merely presented a new trade-off.

The primary benefit of concentrated liquidity is unequivocal: LPs can articulate market views, craft trading strategies, and potentially amplify their yields. But only if he is not wrong; if the LP’s market views are wrong, the losses in IL may far outweigh the trading fees earned. Can we expect passive retail LPs to continuously craft trading strategies that always beat the market?

LPs thus find themselves in the face of a trade-off between capital efficiency(higher returns) vs higher IL(higher risk). Higher risk for higher returns, who would have thought? Ideally, we want to develop a system that does not simply enforce an elemental financial trade-off. More on this below.

The Limitless Approach: Capital Efficiency on Steroids

There is no question that UniV3 is more capital efficient than UniV2. Even so, however, at any given moment most of the liquidity in a pool still isn't utilized beyond the current tick.

Take a look at this query. The weekly fees earned in ETH-USDC 5bps pool, per TVL, is 0.2%, or a measly 10% APR. Right now, there is around $240M of liquidity in this pool, but only around 12% of that is concentrated in +- 5% of the current price. This means the vast majority of liquidity still sits idle even with concentrated liquidity.

One might wonder, if the current liquidity distributions are so inefficient, why not have LPs concentrate more around the current price? Remember, you would then be asking them to take more IL risk in return.

Introducing Liquidity Restaking

Limitless takes capital efficiency one step further and allows Uniswap V3 LPs to restake their liquidity position NFTs directly into the LLF. This is akin to Eigen Layer or the concept of Superfluid Collateral, where yield-bearing assets can be re-staked, or re-hypothecated, allowing the liquidity provider to provide liquidity to two protocols simultaneously.

What does the restaker get in return? Strictly higher yields than what they would earn in Uniswap, as what is being lent out is liquidity that sits idle. Most importantly, the liquidity around the current market price would still earn trading fees generated by order flow directed to Uniswap!

Bonus: From the Limitless Protocol perspective, this has the added benefit in bootstrapping liquidity, as it is recycling existing liquidity in Uniswap to create a money market.

What Limitless Enables

So could a protocol that,

1. Removes oracles

2. Removes forced liquidations

3. Unifies tradable and lendable liquidity

4. Increases capital efficiency

really exist? Well, yes. And that protocol is Limitless. .

And when these features are amalgamated under a singular architecture, like we’ve designed in the LLF, it confers tremendous advantages to three participants -- Traders, Borrowers, and LPs -- in our system.

Let’s explore below.

1. Traders

can

1. swap tokens just like in any other AMMs

2. or open levered trade positions.

In particular, leverage traders will be able to

• long/short any tokens

• with limitless leverage

• without liquidations.

The system won’t need active market makers, oracles, nor governance to list new tokens. The no-liquidation feature allows you to crank up the leverage slider without limit since the system does not necessitate bad debt and insolvency insurance.

You as a trader never have to worry about forced liquidations and scam wicks. For the first time, you will be able to ‘hodl’ your levered longs and shorts, even below your liquidation price. Check out an example trade.

2. Borrowers

similarly can

• borrow against any tokens

• with LTVs up to 99.9%

• without liquidations

By nature of the unified liquidity architecture, if a coin is trading on Limitless, it’s borrowable.

3. Liquidity Providers

are able to earn higher yields without increased IL. Furthermore, by allowing single-sided liquidity positions to accrue interest, liquidity providers will still earn fees even if the price goes out of range.

Conclusion

Our mandate is to extend leverage to every asset on chain, surmount the ultimate UX conundrum of leverage (liquidations), and in this pursuit, make LPing a profitable endeavor once and for all.

By first setting out to remove dependence on oracles and external liquidity, and by unifying two liquidity sources, Limitless Labs is on its way to exploring the architectural possibilities of a hyperstructure— a protocol that can run free and forever, without maintenance, interruption or intermediaries.

Let’s democratize leverage.

Appendix

How do Limitless LPs earn strictly higher yields than they would in Uniswap?

Now, if nobody is being forced to sell with such degen leverage, it’s natural to wonder whether the LPs are being ripped off as a counterparty. In fact, this can’t be farther from the truth.

Borrowers and leverage traders will be quoted a premium to pay periodically, which would be addition of two inputs:

1. where the borrowed range is in relation to the current market price

   If the borrowed range is around the current market price, this portion of the rate would be equal to the trading fees that would have been generated had it been not lent out.

2. the utilization rate of the borrowed ranges

   The higher the utilization rate, the more expensive is this portion of the rate.

Take a look at the figure below. It illustrates an AMM with the following liquidity distribution, the current price is denoted by the bold straight line. Assume that a borrower borrows liquidity in the prices between the dotted lines(on the left figure). There are only two scenarios that can follow;

1. Scenario A: The market price moves left and crosses the borrowed ranges: In this case, the borrower would have to pay portion 1**: the premiums that equate exactly to the trading fees that would have been collected, had the liquidity not been lent out.** In addition, the borrower would pay portion 2: the rate based on utilization rates.

   So the LP is not paying any opportunity cost when lending capital that should have been used for trading. Rather, the LP is making strictly more.

2. Scenario B: The market price moves right and never touches the borrowed ranges: In this case, the borrower would only pay the interest portion that depends on the utilization rates.

The return profile is illustrated in the graphs above. Since the borrowed liquidities accrue lending interest regardless of the current price, the LP will earn positive returns by lending out liquidity that otherwise would have been idle and generate no returns. When the borrowed ranges are crossed, the interest(premiums) spike up and increase in tandem with the amount of trading fees that would have been generated.

In either case, you can see that the LP’s return is strictly greater than the trading fees generated in Uniswap.

Bonus: It is then natural to ask whether the amount of premiums paid for these liquidation protections is practical for the payer.

The short answer is yes. Backtest results show that, for ETH-USDC, the tick around the current price is expected to generate roughly around 1% a day. That means you as a trader/borrower might have to pay 1% of the total position for a full day of liquidation protection if the price does hit your liquidation price. If it shoots right back up again, say, in 1 hour, then you would only have to pay 1/24% instead.

As you can see, the liquidation-free feature fosters a mutually beneficial trade for both the demanders and the suppliers. Simply put, the loss after liquidation price is ‘absorbed by LPs in the form of impermanent loss’. But IL is a risk assumed by all LPs, and in Limitless they are now paid extra to take that risk.

Some Cool Applications…

What is a primitive without a whole set of new applications? In Limitless anyone can create…

• Yield on top of almost risk-free rates

  • restake assets like stETH or stDAI to a limitless pool consisting of stETH/token or stDAI/token and earn yields on top of risk-free rates.

  • The yield comes from people borrowing stETH or stDAI to long pair tokens, or people using pair tokens as collateral to borrow stETH or stDAI.

• Trading/Lending markets for tokenized identity/profile/labor.

  • Long/short/borrow against any tokenized Friend.Tech profiles.

  • Enables uncollateralized lending for profile owners. You own some of your ‘profile tokens’, so you use them as collateral to borrow cash.

  • Borrow against your ‘labor tokens’.

• Principal protected shitcoining

  • When buying a shitcoin with eth, you can borrow eth liquidity from below its current price to cap your max loss. Ex: When you borrow eth from liquidities 90% of the current price, your max eth loss would be at 10%.

• RWA/NFT lending markets

  • Fungify(make ERC721 into ERC20) RWAs, and create a single liquidity hub for both trading or lending against any tokenized RWA.

• Next-gen isolated lending pool

  • There are no distinctions between collateral tokens and lendable tokens like in Kashi. Both token0 and token1 in a Limitless pool can either be lent out or used as collateral.

  • No liquidations, no oracles, permissionless listing, unlimited LTVs, no bad debt/insolvencies, etc

  • LPs earn yields on their limit orders

  • LPs get to customize their strategy risk-reward in accordance with their market view(by providing liquidity closer to current market prices)

• Next-gen Decentralized Options Vaults

  • 0 slippage to sell options

  • no need for market makers to execute trades

  • no oracles

  • earn via providing single-sided liquidity

• Next-gen stablecoins/LST Insurance

  • bearish on a stablecoin or LST? short it with unlimited leverage

  • no oracles, so any stablecoins can be insured

• Next-gen yield speculation

  • a ybAsset/Asset pool where yb represents a yield-bearing tokenized position of the asset. long or short with up to unlimited leverage to speculate on yields.

Some Cool Features…

• Cross collateral trading: Do you own $PEPE, don’t want to sell it, but are bullish on ETHUSDC?

  • Use PEPE as collateral, borrow USDC from Limitless’s PEPEUSDC pool, and use that USDC to long ETHUSDC. You just opened an ETHUSDC long with PEPE as collateral.

• Limit Orders: Incur zero slippage to open levered positions for every asset on chain, regardless of position size.