Lodestar Finance is an algorithmic money market protocol built on Arbitrum that enables users to borrow and lend assets. ^[1][2][3][4]

Overview

Lodestar Finance protocol offers token holders, DAOs, and users in other Arbitrum communities the ability to earn income on their tokens, especially those which are native to Arbitrum. ^[4]

The protocol uses the "Jump Rate" model, similar to Compound Finance, to calculate borrow rates. Interest rates increase linearly before the "kink" based on the utilization ratio, then increase at a faster rate after the "kink". The increase after the kink exists to incentivize the repayment of borrowed assets to maintain sufficient liquidity in the market. ^[4]

Technology

When tokens are deposited into Lodestar Finance, they generate a derivative representing the underlying deposit. In the case of a USDC deposit, a corresponding quantity of l-USDC is provided. The exchange rate for l-USDC/USDC rises in accordance with the supply interest rate of the underlying asset. ^[9]

If USDC suppliers are earning a 2% APR, the l-USDC/USDC exchange rate also increases by 2% annually. Upon withdrawing tokens from the platform, users execute a straightforward exchange of l-USDC for USDC. Due to the escalating exchange rate, they obtain more USDC than their initial deposit, including both the principal and accrued interest. ^[9]

Lodestar Finance Utility

Lodestar Finance allows users to take Long Positions. When a user believes that an asset's value will increase in comparison to USDC, they can execute a long position by depositing their asset in Lodestar Finance and borrowing USDC with their collateral. They can then use the borrowed USDC to buy the same asset until the moment they decide to close their position. ^[4]

At that point, they must repay the loaned USDC amount and retrieve their assets. The profit from this position is the difference between the value of the excess asset (due to its appreciation relative to USDC) and the net accumulated interest (interest costs for borrowing USDC less interest income for depositing the collateral). ^[4]

Lodestar Finance also offers a Short Position option for its users. If a user believes that Bitcoin will decrease in value against Ether, they can execute a short position. They need to deposit ETH in Lodestar Finance and borrow wBTC using their collateral. Afterward, they can sell the wBTC for ETH until they decide to close their position. ^[4]

At that moment, they can buy back the wBTC at a lower price and repay their loan. The profit from this position is equivalent to the value of excess ETH (due to the depreciation of wBTC against ETH), minus the net accumulated interest costs (interest costs for borrowing wBTC minus interest income for depositing ETH). ^[4]

LODE

$LODE is the governance token of Lodestar Finance and it has a total token supply of 20 million. ^[5]

Tokenomics

At launch, 60% of the total supply was distributed to Emissions, 18% to Team (30 months vest, 1-year cliff), 9% to Investors (Community Presale), 5% to Treasury, 3% to Employees, 2% to Community Fund, 2% to protocol Owned Liquidity Seeding, and 1% to Special Arbitrum Odyssey Event. ^[5]

Utility

LODE is a governance token that represents a holder's share of the DAO. Token holders can vote on proposals governing the platform, and voting power is proportional to the token share. Proposals must be discussed among DAO members before going on-chain for a vote. ^[5]

LODE token holders can stake their tokens for a proportional share of protocol fees, paid in ETH. The protocol will distribute to LODE stakers 50% of all tokens allocated to the reserves of the markets. ^[5]

LODE is also used in weekly gauge voting for emissions whereby LODE stakers gain governance power that can be used to vote on emissions allocation to the markets for the following week. ^[5]

Staking

Staking on Lodestar Finance allows users to lock their $LODE tokens into a staking contract. By staking their tokens, users gain staking power, which allows them to earn a portion of the protocol's revenues and influence the protocol’s emissions through a weekly gauge. ^[10]

Optional locking

Part of Lodestar's staking module allows users have the option to lock their tokens to earn additional staking power. By choosing to lock their tokens for 3 months, users can increase their staking power by a factor of 1.4x. For a 6-month lock, the staking power is doubled (2x multiplier).

Relocking Multiplier

Users can also choose to relock their tokens at the end of an epoch to earn a further multiplier on their staking power. The multiplier gained from relocking depends on the duration of the relock period:

• Relocking 3 months grants a 0.05x multiplier
• Relocking 6 months grants a 0.1x multiplier

These multipliers compound over time, meaning users who consistently relock their tokens, especially over 6 months, can accumulate significant staking power over time. ^[10]

Lodestar Finance Hack

On December 10, 2022, Lodestar Finance was exploited in a flash loan attack. The attacker manipulated the price of PlutusDAO's plvGLP token before borrowing all platform liquidity using the inflated token. ^[6]

In a Twitter thread^[7], Lodestar explained the attack flow. The attacker first manipulated the exchange rate of the plvGLP contract to 1.83 GLP per plvGLP, "an exploit that by itself would be unprofitable", said the company. Then, the attacker supplied plvGLP collateral to Lodestar and borrowed all available liquidity, cashing out part of the funds "until the collateralization ratio mechanism prevented a full liquidation of the plvGLP."

Following the hack, "several plvGLP holders also took advantage of the opportunity and also cashed out at 1.83 glp per plvGLP." The hacker was able to burn a little over 3 million in GLP, making a profit on the "stolen funds on Lodestar - minus the GLP they burned.", noted the DeFi platform.

The attacker made around $5.8 million in profit. Lodestar stated that nearly 2.8 million of the GLP (about $2.4 million) was recoverable, which would be used to repay depositors. The company also tried to negotiate a bug bounty with its exploiter:

"If you are the hacker, reach out to us so we can find a white-hat agreement and move on. Recovering the funds of our users is the main priority and we will generously reward your collaboration." - Lodestar Finance tweeted^[8]

Staking esLODE

Users who were affected by the December 2022 exploit were able to claim esLODE. ^[10]

esLODE can be staked to earn protocol revenue and converted to LODE linearly over a period of 1 year. Once staked, it cannot be unstaked. Once esLODE is converted into LODE it is added to the staking balance.

If LODE is locked for 3 or 6 months, converted LODE will also benefit from the locking bonuses, but it will also be locked for the remainder of the lock period. ^[10]

Lodestar on Arbitrum

On April 8, 2023, Lodestar Finance went live on Arbitrum blockchain. The protocol attracted over $30 Million in TVL (Deposits + Borrows) while generating over $23,000 in revenue from the interest paid. ^[11][12]

Following the launch of the protocol, a governance proposal was submitted on May 1, 2023, to deploy $ARB on Lodestar Finance. The majority of LODE holders voted in favor, and as a result, ARB deposits were enabled on May 7, 2023. ^[12]

"$ARB deposits are now live on @LodestarFinance. Head to http://app.lodestarfinance.io to start providing liquidity. Borrows will be enabled in the next hours." - Lodestar tweeted^[13]