L.L.A.M.M.A is a unique feature that elevates the lending and borrowing experience in DeFi. With this innovative mechanism, Lambda Finance allows borrowers to avoid hard liquidations, opening numerous new approaches for portfolio and risk management.

Let’s take a deeper look at L.L.A.M.M.A and why it matters.

What is L.L.A.M.M.A and how does it work?

L.L.A.M.M.A stands for Lending-Liquidating AMM Algorithm, an advanced Automated Market Maker specialized to optimize collateral management with btcUSD.

L.L.A.M.M.A employs a unique approach called soft-liquidations, preventing hard liquidations through continuous collateral rebalancing. Specifically, L.L.A.M.M.A splits collateral among a number of concentrated liquidity tranches known as “bands''; each band represents different liquidity ranges where user assets are used as collateral. These bands function similarly to the Concentrated Liquidity Market Maker (CLMM) model used in Uniswap V3.

When the oracle price of the collateral enters one of these bands, the collateral is gradually sold to btcUSD (or repurchased with btcUSD) within the band limits to maintain the desired collateral ratio. This process involves linear trading of the collateral as the price fluctuates within each band, effectively soft-liquidating the collateral without triggering a hard liquidation event. Hard liquidation only occurs when the collateral price has gone through all the bands and fully triggered all soft liquidations, at which point the borrowers already have enough time to process information and manage their positions in advance.

Borrowers have the flexibility to choose the number of bands, ranging from 4 to 50. By increasing the number of bands, borrowers can lower their liquidation threshold.

In L.L.A.M.M.A, borrowers' collateral is converted into Liquidity Provider (LP) positions within the AMM. This means that the collateral is actively managed and dynamically adjusted, ensuring that it can effectively support the borrower's debt position.

L.L.A.M.M.A incentivizes arbitrageurs to perform collateral rebalancing by slightly adjusting the internal collateral price within the AMM relative to the external market price. Essentially, L.L.A.M.M.A always offers a trade discount to arbitrage bots so that they route their trades through L.L.A.M.M.A and rebalance borrowers’ position in the process.

Soft liquidation vs Hard liquidation

In the Web3 lending ecosystem, most protocols rely on hard (one-off) liquidations, where collateral is fully liquidated once it falls below a certain threshold. This approach results in significant losses and position management difficulties, especially in sudden market disruptions.

L.L.A.M.M.A protects user collateral from the market’s transient intraday volatility, which is a major benefit for BTC holders. One compelling reason why these users have not favored DeFi lending protocols is they have to be exposed to high risk of hard liquidations. This type of users demands a flexible approach that allows them to leverage their BTC position in a reasonably safe way, emphasizing a constant exposure to BTC regardless of market fluctuations.

In practice, there has been no actual way to achieve this in DeFi without the nuances of manually adjusting the position, high cost, high risk, and/or compromising different aspects. With L.L.A.M.M.A, BTC holders can finally leverage their BTC with peace of mind, incurring only small additional costs and minor slippage losses due to continuous collateral rebalancing.

Effectively utilizing L.L.A.M.M.A L.L.A.M.M.A is a novel innovation that may pose some technical and implementation difficulties for our users. This part puts in place a number of useful information that would help you effectively utilize L.L.A.M.M.A:

• During a soft liquidation, you won't be able to withdraw your collateral or add more to your position. Additionally, re-collateralized troves may not be 100% replenished due to slippage loss.

• The loan-to-value (LTV) ratio depends on the number of bands. The higher the number of bands, the lower the LTV. More bands result in smaller losses per day during soft-liquidations but increase the duration of the liquidation process and reduce the total borrowable amount, indicating a higher risk.

• Low number of bands should be preferred in anticipation of crab markets/low volatility to reduce rebalancing loss, while high number of bands should be preferred for high volatility conditions since there is a wider spread of collateral and more time to react.

• When a position is in soft-liquidation, losses occur due to the "rebalancing" of collateral and borrowed assets within the bands of the AMM on the way down (converting collateral for borrowed asset) and on the way up (converting borrowed asset back to the collateral asset). These losses cannot numerically be quantified and are heavily dependent on the number of bands used for the loan and generally how efficient the arbitrage was.

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