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Why I’m excited about Avalon Finance

What is Avalon Finance

The Bitcoin ecosystem is heating up! From various token standards being launched to new Bitcoin layer-2s popping up every week. One Bitcoin L2 that quickly garnered a lot of attention is Merlin Chain. So I dug into their ecosystem and found this project called Avalon Finance, and I was intrigued right away! Let’s dig into why I’m excited about what Avalon is doing.

Avalon Finance TL;DR:

  • Lending protocol on Merlin Chain
  • $220M+ TVL on Avalon’s protocol
  • 3 types of lending pools for highly liquid assets, less liquid assets, and rea;-world assets.
  • An algorithm manages liquidity risks and optimizes asset utilization based on lending/borrowing volume
  • Confirmed airdrop worth a very generous 20% of the total supply
  • Token holders will earn a share of the protocol revenue

Best way to get involved?

What is Avalon Finance

Avalon Finance is the first open-source lending protocol on top of bitcoin Layer 2 Merlin Chain. It offers the opportunity to earn interest by supplying and borrowing assets with any token within the BTC ecosystem.

Avalon Finance three pillars

The protocol is built on three core pillars:

  1. Overcollateralized lending. Isolation pool mechanism, accepting a wide range of supported assets as collateral.
  2. Overcollateralized, algorithmic stablecoin. A stablecoin which leverages the Avalon lending protocol to optimize capital efficiency.
  3. RWA lending. Real World Assets will be integrated into Avalon Finance, both permissioned and permissionless RWA.

The traction so far has been quite impressive. Avalon recently hit $220M+ in TVL, which is a lot given the protocol has been live for… what? 6 weeks? Seems there is a lot of interest from the Merlin degens.

An introduction to Merlin Chain

Merlin is a Bitcoin Layer-2 with 700M+ in TVL. It took the network only a month to reach that, which is quite impressive. Some sources even claim the TVL is higher, nearing $2.5B+. Whatever the 100% accurate number is, we know for sure that it’s a lot. Compare this to other Bitcoin layer 2s, and it’s clear that Merlin Chain stands out above others. For now.

Avalon Finance: isolated lending pool mechanism and interest rate mechanism

Two components ensure safety and continuity of the platform;

Isolated lending pool mechanism

Each collateral type comes with its own inherent liquidity risks. Avalon adds assets into one of three types of lending pools to address this issue:

  1. Main Pool (liquid asset lending pool) -> Permissionless assets characterized by stable prices and resistance to manipulation
  1. Innovation Pool (illiquid asset lending pool)-> Permissionless assets prone to potential price manipulation. Assets in innovation pools may become more stable over time, in which case they are migrated to the main Pool (if the Avalon DAO approves).
  1. RWA Lending Pool -> Permissioned and permissionless RWA token. Think of money market funds, equity indexes, and corporate bonds.

Interest rate mechanism

Avalon Finance deploys an interest rate mechanism which balances the liquidity risks for each asset. The utilization of each asset is optimized by actively adjusting interest rates. Interest rates are based on the Utilization Rate (U).

When capital is abundant, the interest rates are low to encourage borrowing, and when it’s scarce, rates are high to prompt debt repayment and additional supply. The model divides the interest rate curve into two parts around an optimal utilization rate (Uoptimal), where the slope increases sharply beyond this point. If the utilization is below Uoptimal, the interest rate follows a formula with a small slope, and if it’s above, the slope is steeper.

Important factors in the algorithm are:

  • asset liquidity
  • market conditions
  • aligning borrowing costs with market yields to prevent rate arbitrage

Backers, tokenomics, and token utility

Avalon Finance has managed to successful close a seed round:

Alright, smart money is in. Let’s talk tokenomics and value accrual now.

Starting with value accrual for Avalon’s token ($AVAF). Like most money markets and their associated utility/governance tokens, the main value capture is in the form of platform fees:

Avalon Finance platform fees

Protocol revenue? Protocol revenue! Two main sources:

  • Lending revenue
  • Stablecoin minting fee

Taking a look at the supply split, I notice the following:

  • A relatively small percentage of the supply goes to early investors; 10.5% if you include the public sale.
  • The team slice is sitting at 10%, admittedly smaller than the average team allocation in most projects.
  • A large portion of the supply is dedicated to community incentives. To combat an emissions death spiral, the protocol uses a few different ways of granting these rewards:
    • Escrowed AVAF
    • Multiplier Points
    • Protocol Fees
Avalon tokenomics

Wait, airdrop? Yes, indeed, fellow points enjoyer.

Avalon announced that 20% of the total supply will be dedicated to the Avaloninas and Frens of Avalon:

I’ll be accumulating those sweet sweet points myself as well! Fingers crossed for a nice stimmy.

Thanks for reading anon <3

And thanks to Avalon Finance for sponsoring this article. This is a paid partnership.

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