New Collateral Introduction: lvlUSD by Level Money
An Analytical Overview of Arkis’s Decision to Support lvlUSD as Collateral
Executive Summary
Level issues lvlUSD, a stablecoin fully backed by USDC and USDT. The protocol generates yield by allocating reserves to blue-chip lending markets such as Aave and Morpho’s Steakhouse Prime Vaults. This approach prioritizes capital efficiency and risk mitigation by avoiding volatile assets and relying exclusively on highly liquid, low-risk lending venues. This report evaluates Level’s collateralization model liquidity framework, and overall risk profile, to support Arkis’s decision to onboard lvlUSD as a collateral asset.
Key Observations
Collateral & Liquidity Management
Stablecoin Collateralization: Level uses stable tokens (e.g., USDC) for collateral instead of volatile assets. This choice minimizes the risk of economic security loss due to market fluctuations.
Lending Liquidity Provisioning: Level deposits USDC and USDT into AAVE and Morpho Steakhouse Prime USDC vaults. Yield generated is distributed to slvlUSD holders, allowing users to access stable yield from low-risk lending protocols.
Liquidity Targets: There is an active plan to boost liquidity in Curve pools (targeting $10–20 million), which is essential for supporting large redemptions with minimal slippage.
Governance & Security
Immutable Smart Contracts: Level’s contracts are non-upgradable, ensuring no single party can alter core protocol logic.
Admin Multisig & Cold Storage:
An eight-key multisig (5-of-8 required) controls critical administrative functions.
Keys are stored in cold storage (with core team members using Ledger devices) and are geographically distributed.
Movements of funds (e.g., transferring reserves between contracts) require being placed on an allow list and the consensus of external signers.
Signing Protocol: Transactions are signed using dedicated devices and undergo manual cross-checks to mitigate risks such as Radiant-style attacks (i.e., the type of attack recently observed on the Radiant protocol).
Redemption Process & Liquidity Considerations
Dual-Phase Redemption: LevelUSD and staked LevelUSD (slvlUSD) redemptions occur in separate transactions, with a delay designed to mitigate flash loan risks.
Instant Redemption for Liquidators: Whitelisted liquidators have instant redemption rights for lvlUSD (but not slvlUSD, which has a 3-day cooldown). Non-whitelisted users must rely on Curve liquidity for USDC conversion.
Documentation: While most contract addresses are public, some (e.g., the yield manager address) are pending updates in documentation.
Risk Considerations & Recommendations
Below are key risks to keep an monitor:
Contract Monitoring:
Vault Manager Contract Address: 0x5f432430C515964C299bb4F277CdAb0fCC074E25
This should be actively monitored for performance and security risks.
Liquidity Depth & Exit Risks:
The goal of $10M–$20M in Curve liquidity is ambitious but may not be sufficient for extreme redemption events. A contingency plan for deeper liquidity provisioning (e.g., secondary lending markets or market-maker agreements) would be beneficial.
Counterparty Exposure & Expansion Risks:
Current reliance on AAVE and Morpho Prime Vaults minimizes counterparty exposure, but future integrations with additional lending markets could introduce new vulnerabilities. Any expansion should be approached cautiously, with robust due diligence on protocol security and governance structures.
Personal View & Recommendations
Positive Outlook: We appreciate Level’s overall approach, particularly its use of immutable, non-upgradable contracts, which supports a truly decentralized and secure protocol.
Monitoring Key Contracts:
To effectively control the risk profile of Level, closely monitor Vault Manager Contract. Address: 0x5f432430C515964C299bb4F277CdAb0fCC074E25Future Counterparty Risk:While the current focus on AAVE and Morpho Prime Vaults limits counterparty exposure, there is potential risk if Level starts integrating with additional lending protocols. Diversifying to protocols beyond AAVE may introduce new counterparty risks that require close scrutiny.
Conclusion
Level has developed a decentralized and security-focused stablecoin framework centered on lending-based yield generation. By allocating USDC and USDT reserves to blue-chip lending protocols such as Aave and Morpho Steakhouse Prime Vaults, the protocol avoids volatile assets while maintaining a sustainable and transparent yield model. Its use of immutable smart contracts and a multi-signature governance structure further enhances trust minimization and operational resilience.
Key risks—including Curve liquidity depth, evolving contract security, and future counterparty integrations—warrant ongoing attention. Active monitoring of smart contracts and the implementation of contingency plans for redemption demand will be critical to maintaining long-term protocol integrity.
Arkis is integrating lvlUSD as a collateralizable asset on the basis of its direct redemption mechanism, transparent pricing architecture, and clear separation between liquid and illiquid forms of the asset. While lvlUSD meets Arkis’s requirements for real-time liquidation and pricing through its fundamental oracle, staked lvlUSD (slvlUSD) is excluded due to its 3-day redemption cooldown, which limits liquidation responsiveness.
Arkis’s research team has determined that Level’s design meets the risk, pricing, and redemption standards necessary to support safe collateral integration on the platform.