Dan Held: I’ve been writing about Bitcoin DeFi over the last 8 months which includes a variety of protocols including lightning, Stacks, RSKsmart and SovrynBTC.

I’m going to cover ArkadikoFinance, which is a new stablecoin built on the stacks ecosystem

Note that Stacks and Arkadiko have separate tokens. I’m not advocating that you should purchase these token. But it does unlock various functions that Bitcoin cannot do. I like Stacks because it is woven into Bitcoin in a variety of ways which I cover later.

Arkadiko is a decentralized, non-custodial liquidity protocol where users can collateralize their assets and mint a stablecoin called “USDA.” This enables depositors to borrow against their collateral while maintaining upside. Conversely, the depositor could be liquidated.

To do this, Arkadiko allows users to create a Vault. Users can deposit and withdraw assets into their Vault. Based upon the value of the assets locked in the Vault, a Vault Value is decided. Vault Value allows users to create an overcollateralized debt position (loan = 50%).

For every USDA in existence, there exist assets locked into Arkadiko Vaults. USDA is created when a user created USDA debt against collateral in an Arkadiko Vault. USDA is destroyed or burned when a user repays his debt in USDA.

The user takes on debt in USDA and now has the responsibility to monitor the health of their vault (to avoid it becoming undercollateralized) and to repay back his USDA debt should they ever wish to regain access to their assets in the Vault.

ArkadikoFinance also has a governance token called DIKO which is basically the coordination mechanism for decisions in the Arkadiko protocol.

Those who feel it is confusing should check the diagram provided on their website to make it easier to track.

What I personally find fascinating about stacks is that the Proof of Transfer (PoX), also known as a replacement for proof of burn mechanism, throws off a Bitcoin yield for holding STX.

This enables a new novel financial primitive with smart contracts.

For example, with ArkadikoFinance this is called a “self-repaying negative interest rate loan”

So, when you post Stacks in a vault, that yield could pay off your loan interest and principal.

There are all sorts of novel instruments you could create that utilize this Bitcoin yield. Really curious to see that creativity unlocked.

A bit more on Stacks: it can read the Bitcoin blockchain which allows it to have smart contracts that are partially based on Bitcoin. In the future, they hope to bring Bitcoin into the protocol in a noncustodial manner. And the chain is secured by Bitcoin hash power (PoX).

Note that with these DeFi protocols come with substantial risk. Arkadiko had an exploit discovered on October 28th which drained about 12% of the STX – USDA liquidity pool. A post mortem was indeed shared by the team.