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โ๏ธ Algorithmic Market Operations
โ๏ธ What are Algorithmic Market Operations (AMOs)?
Algorithmic market operations (or AMOs) are operations performed by contracts to mint or burn stablecoins without collateral immediately backing these stablecoins. The idea is that stablecoins minted by AMOs are still controlled by the protocol, and if other people start controlling these stablecoins, then this new supply should be properly backed in one way or another.
AMOs are thought not to affect the peg of the stablecoin.
Example
Algorithmic market operations are perfectly suited for lending markets. In this case, the way the AMO would look like is that a contract mints an amount of stablecoins (using no collateral and hence not interacting with the protocol's Core or Borrowing module) and deposits them on a lending market such as Aave or Euler.
These minted stablecoins can then be borrowed by people having a sufficient amount of backing collateral in the lending protocol. It is only when they're borrowed that the minted stablecoins can really be considered to be on the open market. At this point, they are backed by the collateral deposited in the lending protocol by the borrowers. As such, the agTokens originally minted by the protocol contract and deposited in the lending market are over-collateralized when being released in the market.
Implications of AMOs
Algorithmic market operations on a lending market like in the example above have several effects among which an expansion of the agTokens supply and a lowering of the deposit and borrow APYs in the affected lending market.
While this widens the potential user base for borrowers of agTokens, this also reduces the opportunities for agToken lenders and depositors. Note though that in the process, the Angle protocol makes a revenue on the lending yield.
In this specific AMO, borrowed stablecoins are over-collateralized by the borrowers' deposits in the lending market, and as such agTokens remain fully backed.
One issue here, and it's common to almost all AMOs is that, the risk of the agTokens in circulation also becomes the risk of the underlying protocols used (in the example Euler or Aave). If the lending market is Aave and Aave gets hacked, then the Angle protocol also makes a loss.
On top of that, if too many agTokens end up being in circulation through this medium there may not be enough reserves in Angle Core module to maintain convertibility between stablecoins and collateral if everyone comes to burn the stablecoins.
As such, AMOs are a powerful tool to expand agTokens use cases in DeFi as well as protocol revenue, but they do not come without any risk, and every new AMO type should be carefully calibered by Angle governance to eliminate systemic risk.
Angle AMOs
While we described above an example of a lending AMO, the Angle Protocol supports different types of AMOs. Each AMO is previously proposed on Angle governance forum and voted on Snapshot before being put in production.
Management of AMOs is so far done by the governance multisig but is on its way of being automatized through trustless smart contracts.
Lending AMOs
Lending AMOs correspond to the example described above where the protocol mints agTokens (only agEUR so far) and lends it on lending protocols. agTokens minted into such AMOs do not enter in circulation unless they are overcollateralized by a borrower through the concerned money market.
Angle supports so far several different lending AMOs on different chains
Liquidity as a service
Another type of AMO is called liquidity as a service. It consists in lending for a pre-determined agTokens to be deposited in a pool and returned with an interest rate. It can be leveraged by any DAO which is looking to create cheap liquidity for its token.
Risks for the protocol are reduced because it is expected that the partner DAO is taking the impermanent loss in this case.
So far, Angle has worked with Ondo to offer such services, as presented in this governance discussion.
The first liquidity as a service operation has been approved with Paladin as detailed here, to provide 500,000 agEUR as liquidity to PAL through Ondo contracts.