DeFi continues to be an emerging field where technology and practices are constantly evolving, resulting in tailored protocols as needs arise, as is the case with this article, the ALMs. Not too long ago, in 2015, the crypto sector resembled the early days of the soccer industry – you were either a fan of Madrid or Barça. However, from 2017 onwards, there have been many more projects (teams), and each person has their favorite: Cardano, NEO, BNB, Sia, and more. In the DEFI sector, something similar has unfolded since the initial AMMs (2019, Automated Market Makers) up to the current ALMs (2023), Concentrated Liquidity Managers that replace the DEFI manager. Their role is to optimize positions and capture the highest number of fees by being better managed in terms of price ranges. They charge a percentage of the earnings for this service. It could be said that we are facing protocols that act as liquidity hubs, where each blockchain is beginning to have its own.
The real power behind these acronyms is not only in managing pools or liquidity between ranges. This concept goes much further and is beginning to delve into a much more sophisticated financial technique, turning these protocols into self-made management entities, developed through code and mathematics.
I’m referring to a process that involves managing assets and liabilities to ensure that a company or financial institution has enough liquidity to meet its obligations. In simple terms, ALM is a way of managing the financial risks associated with managing assets (loans, securities, and deposits) and liabilities (payment obligations, such as deposits and bonds). This practice involves monitoring and managing the risks associated with fluctuations in interest rates, exchange rates, and other factors that can affect the value of the assets and liabilities of a decentralized financial institution. For instance, a financial institution could use ALM to ensure it has enough liquidity to meet short-term payment obligations. To achieve this, it could utilize tools such as smart contracts and decentralized finance protocols to manage its assets and liabilities more efficiently, thus reducing the risk of financial losses.
This implies that the risks associated with lending and borrowing activities are managed transparently and in a decentralized manner, without the need for intermediaries such as banks or other financial institutions. This represents a significant departure from traditional ALM. Other distinctions that highlight and justify the use of these new decentralized financial protocols within blockchain are operating in a liberated environment and providing greater accessibility to financial services compared to traditional ALM. Additionally, the programmability enabled by smart contracts facilitates the automation and execution of various financial operations.
Concluding the article, I will cite examples of various DeFi protocols that employ ALM to manage their assets and liabilities:
MakerDAO, a DeFi protocol that employs ALM to manage its stablecoin, DAI. The protocol uses a Collateralized Debt Position (CDP) system to generate DAI, which is pegged to the US dollar. The ALM system ensures that the collateral’s value is sufficient to cover the value of circulating DAI.
Compound, a lending protocol that utilizes ALM to oversee its lending and borrowing activities. The protocol employs a dynamic interest rate system based on supply and demand. This ALM system ensures that the platform maintains adequate liquidity to meet the demand for lending and borrowing activities.
Aave Companies, another lending protocol, utilizes ALM to manage its liquidity. The protocol employs a system of reserve pools to ensure it has sufficient liquidity to meet the demand for lending and borrowing activities. The ALM system also ensures that the platform can manage its exposure to different types of assets and borrowers.
serves as an interoperable bridge for moving assets to Ethereum. The protocol employs ALM to manage its collateralization system, allowing users to qualify as validators on the network by staking 100,000 REN as collateral.