What is Artichoke?

Artichoke is a liquidity provision protocol housed on the Arbitrum One blockchain. It aims to enhance on-chain capital efficiency by allowing users to provide single-sided liquidity through its infrastructure tooling that enables the provision of one-sided liquidity to be added to any token. Artichoke benefits protocols and investors by reducing the need for token incentives to develop robust liquidity pools and mitigating impermanent loss for LPs (Liquidity Providers). 

Key Takeaways 

• Artichoke enables users to deploy single-sided liquidity and earn swap fees.

• It enables the mitigation of impermanent loss for LP providers while providing deeper liquidity pools for smaller protocols without them having to incentivize and inflate their native tokens.

• Artichoke’s Omnipool model is AMM agnostic and can be placed above any standard V3 AMM model, allowing the concentration of liquidity through its Omnipool and tails structure.

Before diving into Artichoke’s solution, a word on permissionless infrastructure. DeFi allows anyone from anywhere full and unfettered access. However, this mandates certain structural constraints. A prime example would be the prevalence of over-collateralized loans. Anyone can access loans without any verification or vetting processes (permissionless). Therefore, they need to be guaranteed upfront. 

The lack of centralized third parties opens opportunities for investors to earn fees, and arguably, the most salient example is liquidity provision. Users create LP tokens and act as market makers, earning fees from all trading activity. But one of DeFi’s worst-kept secrets is that the majority of liquidity providers are losing money. 

Toxic Liquidity – The Perils of Impermanent Loss 

The AMM (Automated Market Maker) model represents one of the most significant breakthroughs in the decentralized landscape, allowing traders to swap assets twenty-four hours a day permissionlessly. Liquidity providers create LP tokens, a token representing an equal split of the associated tokens automatically balanced by smart contracts following the formula x*y=k. 

• X: Token 1 

• Y: Token 2 

• K: Constant 

Buy and sell activity within the associated pool determines the price. And traders use LPs as their counterparty, paying a swap fee typically 0.3% to these market makers. 

Permissionless trading, earning swap fees, powering decentralized markets. It all sounds great, but all LPs are exposed to impermanent loss. A research paper released in 2021 from Topaz Blue and Bancor Protocol reported that 49.5% of liquidity providers on Uniswap V3 had incurred negative returns due to impermanent loss, and these LPs would have been better off holding the assets as opposed to participating in market-making activities.  

Impermanent loss, in simple terms, is the difference in price at deposit versus withdrawal. This can, and often does, outweigh the gains from trading fees. 

Users create an LP token with an equal split of assets (under the traditional AMM model), smart contracts automatically rebalance the ratio, and any deviation in the price of either asset will lead to the investor suffering impermanent loss. A key point to note is that impermanent loss occurs in both directions, and LP tokens massively limit the upside potential of the contained tokens. 

Source: https://dailydefi.org/tools/impermanent-loss-calculator/

A theoretical calculation shows that if an LP provides token A and token B, and they are fortunate enough that token A does a 10X, but in this scenario, token B only increases by 25%. Providing $1,000 of liquidity would yield $3,535.53, and simply holding would yield $5,625. This formula example uses the 50/50 AMM model in its calculations, which has become increasingly outdated. But the general point remains firm. 

Why Are LPs Still Providing Liquidity? 

The report studied 17 pools and found that only 3 of these earned fees exceeded impermanent loss and, in these scenarios, only marginally. So why are users participating in liquidity provision activities when they can grow their portfolio faster by simply holding? Unfortunately, nobody knows the answer to this question. 

Uniswap alone boasts more than $3.3 billion in liquidity, and collectively, decentralized exchanges have a TVL exceeding $12 billion. One notable trend within recent months is that the total TVL of lending protocols overtook that of DEXs – an on-chain signal that investors are finally waking up to the cold reality of LPing?

Conjectures can be made as to why this behavior is ongoing, with the most obvious suggestions pointing to human psychology. Crypto investors love yield, and the promise of trading fees is far more attractive than the idea of holding assets. Protocols have similarly encouraged this behavior through early inflationary token incentives. And many investors may still remember the glory days of yield farming in 2020/2021. Has this nostalgia perhaps prevented them from looking at the raw data of the current landscape? 

Another potential explanation for this activity would be the perceived upside of the farmed token. These LPs discount losses incurred today by their LP pair, believing the resulting yield will eventually be worth more. Or alternatively, boredom and the simple premise that doing something is better than doing nothing. However, in the case of providing liquidity, this thesis does not hold water. 

Source: https://dune.com/KARTOD/Uniswap-Impermanent-Loss 

Source: https://dune.com/KARTOD/Uniswap-Impermanent-Loss  

Regardless, the current macro is that hundreds of thousands of investors are losing money by providing liquidity to decentralized exchanges, and nobody knows why. These Dune dashboards show the impermanent loss accrued by LPs in the USDC-WETH pool on Uniswap V3. This relatively stable pair cannot hope to outpace the incurred impermanent loss via trading fees, and the picture gets even shakier when pairing two volatile assets.

Several significant upgrades have been made to the AMM model, most notably Uniswap V3 and Trader Joe’s Liquidity Book model. Still, these concentrated liquidity ranges encourage greater PVP, and impermanent loss is just as prevalent, if not more prevalent, given the tighter price band constraints. In short, the only profitable way to provide liquidity is to pick a pair with similar behaviors (stable-stable). 

Artichoke’s Single-Sided Liquidity Provision 

Enter Artichoke, a protocol enabling single-sided liquidity provision for any token and aiming to deliver what has long been a pipe dream in the DEX space. Omnipools and tCHOKE together form a new integrable financial primitive, allowing users to sidestep impermanent loss. 

Source: https://articho.ke/ 

At a high level, Artichoke is a building block deployed on top of AMMs that unites liquidity. Instead of, for example, USDC supplying liquidity to one asset at a time, Artichoke increases usable liquidity by bonding all these assets together in the Omnipool through the use of tCHOKE. 

Source: https://mirror.xyz/0xcC1fa08268a25E4d7627cCB95f939C96e0ad9C8D/DLwc0ApTYQpmW53qZ74yh60CRBY-4fuIKIZv-_c5VPs 

Omnipool Model 

Instead of leveraging separate pools for each asset pairing, Artichoke introduces a universal pool: The Omnipool. ‘Tails’ comprise this pool, with each ‘tail’ representing the available liquidity for each token contained in the Omnipool, with all of these tails linked by tCHOKE, a synthetic asset. 

Each tail represents an asset, and the Omnipool contains all these tails. The overwhelming strength of the model is its ability to be placed on top of any V3 AMM model, making it AMM agnostic. When users deploy liquidity, the protocol mints a corresponding value of tCHOKE, creating a pair, and the user receives a receipt. The tail manager is the holder of this position, and when the user wants to withdraw their position, they return their receipt. 

In the event that the asset price decreases, they will receive a greater amount of the tail asset. Half of this position and associated swap fees go directly to the user, and the remaining half gets split two ways: 50% will be used to buy and burn tCHOKE, and the other 50% will be distributed as CHOKE to stakers. If the tail asset price rises, it results in a higher amount of tCHOKE. 

Sounds confusing? That is because it is. Artichoke is, at its core, a mathematical solution to impermanent loss. Hence, explaining its functionality can be a little bit clunky. However, this article will endeavor to straddle between the high level and the reality of the protocol’s functionality. Readers who want to dive deeper into the technicals can read more at Artichoke’s Documentation.  

tCHOKE

tCHOKE is the backbone of Artichoke liquidity. This token is a synthetic liquidity counterpart for tails primarily backed by USDC. Every time a user deposits a single asset, Artichoke pairs it with tCHOKE to enable greater swapping efficiency. 

tCHOKE is the mathematical glue plugging the whole protocol together. It enables this higher level of capital efficiency by streamlining the pairing process. Instead of each asset having an individual liquidity pair, they are all paired with tCHOKE within the Omnipool model. Although there are more moving parts from a technical perspective, when it comes to the swapping process, there are fewer. And fewer parts means greater efficiency. 

tCHOKE keeps everything liquid and derives benefit from being backed by USDC, a stable asset. Below, an example will be featured to outline tCHOKE’s value proposition clearly. 

The user has three tokens: $500 USDC, $500 Token A, and $500 Token B.

Under the typical V2 model or V3 full range – when liquidity is deployed evenly along the entire length of the price curve – to supply liquidity and earn swap fees, the user would have to pair $500 of USDC with Token A and $500 of USDC with Token B. It involves the creation of two pools, and the paired asset (USDC) has been fragmented. 

Whereas under Artichoke’s model, the user would deposit $500 USDC in the USDC-tCHOKE tail and then deposit $500 of Token A and $500 of Token B, and both assets gain access to tCHOKE liquidity. Liquidity is united, and assets can effectively route through a single liquidity source. 

Source: https://typefully.com/eli5_defi/artichoke-protocol-118Tyew 

Artichoke Overview – The Value Proposition 

Artichoke provides a litany of benefits under its new economic model, and this gigabrain maths is great for liquidity providers, DeFi more broadly, and CHOKE holders.  

For Artichoke Users

From the user perspective, it streamlines the process of supplying liquidity and will likely increase the overall amount of supplied liquidity. If users can deposit single-sided assets, liquidity provision is far more attractive because they can still capture the token price appreciation upside and earn swap fees. Another advantage is that when a user deposits an asset, Artichoke mints tCHOKE to form a pair, and the user effectively accrues trading fees for double the value of their tail asset (2X leverage). Users dodge impermanent loss, and the mental overhead for managing liquidity positions gets outsourced to Artichoke’s smart contracts. 

For DeFi

Regarding DeFi, Artichoke’s AMM agnostic Omnipool reduces liquidity fragmentation and provides an excellent tailwind for smaller DeFi protocols, helping them overcome the cold start issue. Instead of incentivizing liquidity pools via unsustainable inflationary token emissions, they can rely on Artichoke, which will provide the pegged liquidity for their token. Infrastructure upgrades like the Omnipool model provide foundations for the meta-development of more sustainable business models. 

For CHOKE holders

Finally, CHOKE holders. CHOKE is the native governance and a revenue-sharing token allowing users who stake their CHOKE to earn a percentage of protocol revenue. And profit-sharing has become a defining characteristic of the Arbitrum Avantgarde – the new generation of Arbitrum-native protocols. 

CHOKE Tokenomics 

Artichoke divides revenue directly between liquidity providers and the protocol. It will be stated at this point that the current rewards for CHOKE staking are inflationary, but this will change once the protocol starts generating real yield.

Source: https://artichoke.gitbook.io/abstract/token-metrics/accruing-value 

Whenever a user closes a position and hands their receipt to the tail manager, half of the swap fees go directly to the liquidity provider, but the other half goes to the protocol. Half of this burns tCHOKE, and the remaining 50% purchases CHOKE distributed proportionally among CHOKE stakers. Additionally, protocols that want to whitelist their token for Artichoke’s liquidity services will have to have a minimum amount of staked CHOKE – aka buy pressure. 

The maximum supply of CHOKE will be 640,000,000. And the initial circulating supply was 76,800,000 (12% of the max supply). 

CHOKE Breakdown

• 10% for Team (Locked and vested)

• 5% for Growth and Marketing

• 25% Ecosystem Fund

• 20% Public Sales

• 40% for LP

Artichoke has also committed to an ongoing token burn with an outlined yearly burning schedule with tokens burnt each week: May 2.25%, June 1.75%, July 1.5%, August 1.25%, September 1%, October 0.75%, November 0.5%, December 0.25%. This means a total of 9.25% burnt by the end of 2023. 

The Future of Artichoke 

Source: https://twitter.com/artichoke_fi/status/1695498488023298076/photo/1 

Artichoke’s deployment has been slower than many expected. However, this security-first approach is incredibly refreshing in crypto’s move fast and break things meta. The developers behind Artichoke are incredibly security-sensitive, which is very bullish long term. 

Ostensibly a Beta launch for CHOKE stakers should come in October, and a public Beta launch in November. Artichoke will initially deploy 3/4 high-liquidity tails, including CHOKE, ARB, WETH, and an as-of-yet undisclosed partner. 

Regarding risk management, Artichoke employs its stabilizer pool, which offers a real-time reference for all liquidity available and maintains a healthy USDC collateralization ratio. The protocol leverages V3 pools as price oracles using TWAP (time-weighted average price) as its reference for tCHOKE ratios. Artichoke’s Plunge Protection triggers when a health factor crosses a pre-defined threshold – if a tail asset’s price increases beyond USDC liquidity, the Omnipool is automatically rebalanced using USDC reserves accrued from protocol fees. 

Situating Artichoke in the rapidly evolving DEX meta gets more interesting, and its AMM agnostic approach means that Artichoke’s liquidity model will always be applicable. All Artichoke does at a high level is concentrate liquidity, making it integrable into modern DEXs and any future models such as Uniswap V4.  

Financial Primitives: A New Meta for Liquidity Provision 

Primitives are beautiful things. And Artichoke’s approach could entirely restructure DeFi’s current architecture. 

Under the Omnipool model, traders face lower slippage, LPs earn greater fees and avoid impermanent loss, and nascent DeFi protocols can access deep liquidity without inflating their native tokens. 

Other interesting applications come in the form of treasury management. Theoretically, protocols could deploy their holdings (typically, treasuries contain a massive stack of the protocol token and not much else) to earn yield without having to sell (and risk triggering an investor confidence death spiral).  

Typically, DeFi protocols launch an innovation on an existing concept, but in the case of Artichoke, it introduces an evolution. The AMM agnostic economic engine that is the Omnipool and all the contained tails could reshape liquidity provision – one of DeFi’s core building blocks and primary economic activities.

The larger question remains. If users can avoid impermanent loss and provide liquidity in a single token, enjoying essentially 2X leverage on trading fees while capturing upside price movement, why would investors not supply liquidity? And the knock effects, in theory, are particularly striking for smaller protocols. Could Artichoke introduce the blueprint and technical capacities for more sustainable economic models within DeFi? Only time will tell.