Aloe Protocol
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Litepaper
An overview of the Aloe Protocol. (v1.2, Sept 2021)

Motivation

Uniswap is the largest automated market maker (AMM) by trading volume on Ethereum. The Uniswap V3 update changes how liquidity providers interact with the protocol, giving them more fine-tuned control and opening the possibility for increased capital efficiency. However, this imposes a new challenge, as participation now requires active liquidity management, which previously was completely passive..
Additionally, Uniswap V2 liquidity provider (LP) tokens are used in a number of different contexts throughout DeFi, such as collateral in other DeFi protocols or as a holding in protocol-controlled value (PCV). Uniswap V3 handles LP balances with NFTs representing unique positions, which makes integration with other DeFi protocols significantly more challenging.

Abstract

The Aloe Protocol is a liquidity allocator for AMMs, targeting Uniswap V3 at launch. Aloe Blend uses a hybrid liquidity management system that's designed to earn more trading fees for liquidity providers (LPs) without requiring them to select specific ranges or manually move their funds around. This is done through silos, which are adapters to arbitrary yield strategies that enable otherwise idle funds to earn extra yield.
Aloe recognizes the importance of composability in DeFi. As such, the Aloe Blend Vaults are designed to be drop-in replacements for existing use cases for Uniswap V2 or other V2-style LP tokens. Blend Vault shares are designed to have a 50:50 asset ratio while still earning more yield than a traditional V2 LP token, and provide flexible ways to deploy capital. This also avoids the pitfalls of "locking-in" impermanent loss (IL), which can be a persistent damper on more actively managed strategies.
Aloe Capital intends to make markets more equitable, stable, and intuitive for everyone involved.

Blend Vaults

Aloe Blend Vaults address the problems of managing liquidity and unpredictable value changes. To achieve the same impermanent loss and volatility characteristics as Uniswap V2, Aloe Blend uses the same liquidity density as a 0->infinity position. To achieve higher yields, assets far from the current price are deposited to yield platforms, rather than sitting dormant like they would in Uniswap. This design stands in contrast to other V3 position managers, which exclusively concentrate liquidity.

Rebalances

While active management strategies on Uniswap V3 use trades to rebalance - either directly traded or by converting assets through range orders - Aloe Blend does not need to convert assets. This is because the same density of funds is used as Uniswap V2 - meaning as price shifts within the Uniswap V3 position, the vault's overall ratio of assets remains 50:50.
However, because liquidity depth in ranges far from the trading price are deployed into silos, there needs to be a mechanism to pull them back as they are needed. This is done through Blend's "rebalances". As seen below, this mechanism is effectuated exclusively with deposits and withdrawals, preventing any "locking-in" of IL.

Aloe DAO

The primary purpose of the Aloe DAO (Decentralized Autonomous Organization) is to keep the Aloe Protocol adaptable to changes in cryptocurrency markets and in the DeFi ecosystem.

Governance

To allow the DAO to modify the Protocol itself, it has permission to modify the smart contracts implementing the protocol. The DAO will have permission to modify the contract proxies, allowing them to point to a new implementation. Additionally, certain contract parameters can be adjusted without redeploying.

Conclusion

The Aloe Protocol creates a new financial structure improving the experience of being a liquidity provider. It provides censorship-resistant opportunities for earning yield on trading pairs, mitigating impermanent loss, and flexibly deploying capital. Additionally, it lowers the bar to entry for investors and creates a composable building block for the broader DeFi ecosystem. The decentralized governance process helps mitigate systemic risk to the protocol, and the treasury incentives will help preserve the long-term viability of the project.
Note: Content of this page is as of last update. Protocol design is subject to possible revision.