Lemma Finance

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Lemma is a protocol built on Arbitrum that offers a basis trading vault and a decentralized stablecoin, called USDL, backed by arbitrage opportunities. Users can deposit assets into Lemma Basis Trading Vault or they can use them as collateral to mint USDL. When a user deposits assets into the Basis Trading Vault, the protocol uses these assets to mint and stake USDL, while the user receives xUSDL (staked USDL) in return.[1]

The USDL Stablecoin


USDL maintains peg through arbitrage. If the price of USDL drops below its $1 peg, ideally rational actors would buy as much USDL as possible, and then redeem each USDL for $1 USD worth of assets. If the price were to rise above its $1 peg, ideally rational actors would mint as much USDL as possible (since 1 USDL can always be minted for $1 worth of assets), and sell the newly minted USDL for assets on the spot market.[2]

Users can mint USDL and exchange USDL for $1 USD at all times as each USDL is backed by a "synthetic USD".[3]

Synthetic USD

Each USDL is fully collateralized by a "synthetic USD", which are created by Lemma using market neutral positions.[4]

When a user deposits assets into Lemma, Lemma moves the assets to a decentralized derivatives exchange. The protocol uses these assets as collateral and opens a short perpetual position. If users only want to mint a stablecoin, USDL corresponding to the value of the deposited assets is issued to the user. If the user wants to use the basis trading vault and earn yield, then the minted USDL is staked to access profits and losses from funding rate payments (the user receives xUSDL in return which reflects these profits and losses.)[5]


For example, if a user deposits $1000 worth of ETH, Lemma will create a portfolio of 1000 "synthetic USD" on their behalf, and mint 1000 USDL to represent the user's stake in the overall Lemma "synthetic USD" portfolio. The protocol uses the users deposit as collateral to enter into a corresponding short Perpetual Future position on a derivative exchange. If the price of ETH increases by $100, the users long position (the ETH that the user holds which was deposited into the protocol) increases by $100 as well. At the same time, the worth of the short position (the short Perpetual Future opened by Lemma once the user deposited) will decrease by $100. Therefore, the total change to the position and the value of the users "synthetic USD" is 0, meaning that each USDL is backed by a market neutral position.[6][7]

Collateral Assets

USDC, USDT and ETH can be used deposited to mint USDL.[8] If users deposit USDC, Lemma will sell this USDC for ETH, using 1inch.[9]

Basis Trading Vault

When a user deposits assets in the basis trading vault, Lemma uses those assets to automatically mint and stake USDL on their behalf. In return, they receive xUSDL (the staked version of USDL) that increases and decreases in value with the yield produced.

The Basis Trading Vault earns yield through funding rate payments, earned through the short perpetual position opened upon users' deposits. Only users that stake their USDL are exposed to the profits and losses of the trading, while every USDL is always used to generate yield and returns through funding payments. Therefore, USDL stakers are exposed to the profits and losses of both their own USDL and the unstaked USDL.

When users deposit assets into the basis trading vault, they receive xUSDL (staked USDL) in return. That xUSDL represents the user's principal (deposited assets converted to USDL) plus the PnL (profits and losses) from the basis trading returns on: their principal + a proportional amount of unstaked USDL.

There is currently an 8 hour delay after users initiate unstaking for their xUSDL.[10]


Lemma Token and Governance

Lemma will issue LEMMA tokens to manage governance for the stablecoin. Holders of the token will be able to set risk parameters, prioritize the roadmap and propose new features.[11]

Treasury and Insurance Fund

Yield gained through the Basis Trading Vault will be used to fund the treasury/insurance fund. Initially, 30% of profits will be allocated. These will be used to increase the security of the stablecoin and mitigate risks. yield towards the treasury/insurance fund will help increase the security of the stablecoin & help mitigate some of the risks mentioned in the next section.[12]


Smart Contract Risk

If there exists a critical bug in the smart contract written by Lemma or the underlying derivative exchange, user funds may be lost and USDL may be undercollateralized.[13][14]

Negative Funding Rates

If funding rates are negative for a prolonged period, this could lead to risks for both USDL and Basis Trading Vault users.[15]

If a large number of users withdraw their assets from the Basis Trading Vault but keep their assets in USDL, this could lead to increased "leverage" for remaining Basis Trading Vault Users. This increased risk could lead to increased losses for remaining users of the Basis Trading Vault, since all Basis Trading Vault users are exposed to the profits and losses for all USDL (not just those that are staked).[16]

Stablecoin users' are exposed to the risk of not being able to redeem their USDL for 1 USD worth of cryptocurrency, if there was a prolonged period of negative funding payments that emptied the treasury/insurance fund and there were no assets in the Basis Trading Vault.[17]

Websites and Socials

Website: https://www.lemma.finance/

Twitter: https://twitter.com/LemmaFinance

Docs: https://docs.lemma.finance/