Exploring Arkadiko’s self-repaying loans on Stacks

Imagine being able to use your crypto as collateral for a loan, and have that collateral itself pay back the loan. This concept is at the core of Arkadiko, the pioneering lending protocol on the Bitcoin Layer 2 Stacks.

In recent months, the notion that Bitcoin requires financial layers built on top of it has been gaining traction in the crypto community, and Arkadiko is leading the way in this emerging trend. In this article, we will guide you through the innovative Stacks DeFi protocol, providing insights into its potential and explaining how to use it.

Check out our complete overview of all Stacks DeFi projects here.

Arkadiko in a nutshell

Arkadiko Finance is a pioneering decentralized finance (DeFi) platform that operates on the Stacks blockchain, specifically designed to interact with Bitcoin. It enables users to borrow against their Stacks ($STX) and, in the future, their Bitcoin ($sBTC) holdings. This allows users to hold onto these crypto assets for the long term while utilizing the loan for short-term opportunities, such as in DeFi. One of Arkadiko's most compelling features is the concept of "self-repaying loans," where the interest generated by your collateral gradually pays off the loan. By staking your $STX in Stacks, you can help secure the blockchain and receive a yield in Bitcoin. In Arkadiko, this yield is utilized to gradually repay your loan.

Once you have deposited your collateral, you can create a loan. Each loan must be overcollateralized by at least 150%. If the value of your collateral falls below this threshold, your loan will be liquidated, resulting in the loss of your collateral. The loan is issued in Arkadiko's own stablecoin, USDA, which you can use in other Stacks-based protocols such as Alex and Stackswap to purchase other assets or generate a yield. You can repay the loan at any time in USDA, and depending on the loan duration, you will need to pay interest, referred to as the stability fee.

For more information about the protocol and tech, check out Arkadiko’s Github or documentation.

Team

Arkadiko Finance was founded by Philip De Smedt and his co-founders who are Bitcoin enthusiasts. However, in the spirit of crypto, Arkadiko is not owned by the founders but by the community of token ($DIKO) holders. This makes Arkadiko a Decentralized Autonomous Organization (DAO). All decisions are made by community members on the forum and through snapshot voting by token holders, which is accessible on the project's app. A group of core contributors plays a key role in maintaining the infrastructure and codebase of this community.

The development journey of the project includes winning a hackathon and receiving a significant grant from the Stacks Foundation. Additionally, the Stacks accelerator, a key investor behind Arkadiko, further emphasizes the strong connections the project has within the Stacks ecosystem.

Arkadiko Tokens

DIKO

Arkadiko has a native token, $DIKO. This token is essential for the DAO governance of the protocol and can be used in voting. Additionally, users can stake DIKO to earn rewards. At the time of writing, the staking yield is 3.8% and is provided in DIKO tokens.

In total, there are 100 million DIKO tokens, of which about 55 million are currently circulating. The remaining tokens are either vesting for the team and investors, but predominantly remain in the protocol's treasury to reward and incentivize users.

Check out DIKO's token page here.

USDA

The second token of the protocol is USDA. This is an algorithmic stablecoin that should be pegged 1:1 to the US Dollar. USDA can only be created via loans and is destroyed again once a loan is repaid. This process ensures that for every USDA in existence, there's a corresponding value of assets locked in Arkadiko Vaults and means the USDA's market cap is generally a proxy for the total amount of outstanding loans on the platform.

However, like all algorithmic stablecoins, USDA is not immune to market fluctuations and risks such as depegging. Depegging occurs when a stablecoin's value deviates significantly from its pegged asset, in this case, the US Dollar. For USDA, its value has been recorded at various points, reaching an all-time low of $0.4544. Over the past months, USDA has been gradually climbing back to its peg, and the team is set to roll out various new features to further balance USDA to its Dollar peg.

Liquidations

When the value of the collateral of a loan falls below 150%, the collateral gets liquidated and sold. The Liquidation Pool is a pool of USDA capital used directly for collateral purchases during liquidations. Participants in this pool can contribute USDA and, in return, receive a share of profits and contributions. During a liquidation event, the USDA in the pool is exchanged for discounted assets like STX. Additionally, DIKO token emissions are directed towards this pool, offering an attractive yield opportunity for participants.

Traction

Let’s look at some quick stats for Arkadiko. As the market is always on the move, these stats will change with time, so we’ve added the links so you can look at the up-to-date stats yourself. First, the key metric for a project like Arkadiko is the Total Value Locked (TVL), or how much money is deposted, in the protocol. At the time of writing, Arkadiko’s TVL for its loans is $10.5 million, a 10x increase from the start of 2023. Additionally, the TVL for the project’s exchange stands at $2.5m.

When comparing Arkadiko’s TVL to similar projects on other chains like MakerDAO, Liquity and Lybra, it is still tiny. However, as the Stacks ecosystem matures and sBTC comes to the ecosystem, Arkadiko’s TVL could significanlty increase.

Arkadiko’s Future Plans

In 2024, Arkadiko Finance has planned significant developments as part of its roadmap, with a primary focus on its major upgrade, Arkadiko 2.0. This upgrade aims to enhance the core architecture of the protocol in response to evolving market and technological dynamics. One key aspect of this upgrade is the improvement of the stability of Arkadiko's USDA stablecoin, achieved through the introduction of a new Vault exchange mechanism for arbitrage purposes. Additionally, Arkadiko plans to launch a StableSwap program and aims to achieve stablecoin liquidity through Bitflow. Another noteworthy development is the support for stSTX, which is the first liquidity stacking token on the Stacks blockchain. This token will be accepted as collateral in Arkadiko Vaults.

Check out Arkadiko’s detailed roadmap here.

Closing thoughts

In the past year, the Bitcoin Economy, which refers to the financial infrastructure built around Bitcoin, has experienced rapid growth. This growth has been primarily driven by Stacks, the leading Bitcoin Layer 2 protocol. Arkadiko, as the only lending protocol on Stacks with years of building, networking, and experience, stands to benefit from this growth compared to its potential future competitors. To ensure the project's success, it is crucial to restore the USDA peg, which is a key component of Arkadiko's updated roadmap. With various lucrative earning opportunities on the platform and the ability to unlock more capital without selling assets, Arkadiko is poised for a promising future.

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