Project Insight: Solend - The Interest Rate Machine on Solana

Solend protocol is attempting to become a mainstay of the Solana ecosystem by emulating the strategies Aave and Compound have done on Ethereum.

By
Abhinav Tewari
on
April 15, 2022
Category:
Explainer

Introducing Solend

Solend is a decentralized finance (DeFi) protocol designed to enable borrowing and lending on the Solana network. The protocol generates interest rates algorithmically. Solend is attempting to capture significant market share in the Solana community similar to Aave and Compound, which have been mainstays of the Ethereum ecosystem since their advent. It claims to be 100 times faster and cheaper than other alternatives in the Decentralized Finance (DeFi) space, in addition to being the most secure and easiest to use.

Source: Solend Medium

Solend was introduced in the Solana Season Hackathon, held on June 2021; it was the leader in the DeFi category and has since become a leading lending/borrowing platform on the Solana blockchain.  

Lending and Borrowing on CeFi vs. DeFi 

Lending and borrowing services are offered in the cryptocurrency space by both Decentralized and Centralized Finance (CeFi) protocols. BlockFi and Celsius are key players in the CeFi space, and they operate in a manner similar to that of banks, which is why these organizations are referred to as ‘crypto banks.’ 

Source: CeFi vs. DeFi Research Paper

Let’s consider BlockFi, a popular CeFi protocol. It takes custody of deposited assets and lends them to institutional participants such as market makers, hedge funds, and other platform users. Although the centralized lending model is widely adopted and considered reasonably successful, it is vulnerable to the same issues as centralized crypto exchanges, such as the loss of customer deposits due to hacking or other forms of negligence. It can also be argued that the CeFi model contradicts one of the primary value propositions of cryptocurrencies, namely self-custody of the assets; this is where DeFi lending differentiates itself.

Source: CeFi vs DeFi Research Paper

DeFi lending enables users to become lenders or borrowers in a completely decentralized and permissionless manner while still maintaining full custody of their tokens. DeFi financing is based on smart contracts that run on public blockchains such as Solana. This is also why, in contrast to CeFi lending, DeFi lending is available to everyone without the requirement for KYC or trusting a centralized body to regulate the transactions.

What Solend Offers its Users

At present, Solend offers users the ability to:

  • Lend/Supply assets to earn interest.
  • Borrow against holdings.
  • Short.
  • Leverage long.

We shall understand in brief how Solend makes all this happen for the Solana community.

Lend/Supply: Users can deposit any of the supported assets on the platform in return for interest and rewards. The interest rate or Annual Percentage Yield (APY) is set algorithmically depending on the utilization of the supplied asset. The supply rewards offered are in the form of SLND, which is the native token on Solend. The process of earning these additional rewards is called Liquidity Mining. These additional SLND rewards encourage users to join the platform and increase the SLND token's overall liquidity, and rewards are available on the third of each month at UTC Midnight.

Another key point to note is that The APY is distributed using the same token as the supply. This means deposits in BTC–receive BTC yields, deposits in SOL–receive SOL yields, etc. This is due to the fact that the APY on borrows is also levied on the same yield. 

Borrow: Users can borrow any of the supported assets on the platform by using funds as collateral. The amount users can borrow depends on the total funds available in the market and the loan-to-value ratio of supply tokens. The loan-to-value ratio (LTV) defines the maximum amount that can be borrowed with particular collateral. It varies depending on the asset type; for example, if the LTV for BTC is 80%, the amount of BTC that can be borrowed for 1 BTC as collateral is 0.8 BTC. Therefore the value of borrowed amount should always be lower than the value of funds used as collateral–this is called over-collateralization.

Another critical concept borrowers need to understand is the ‘Liquidation Threshold.’ In simple terms, it is the point at which the loan reaches the under collateralization stage. If the value of the amount used as collateral falls below the specified collateral level, the user's collateral will be liquidated in order for the protocol to balance the borrowed amount. The liquidation threshold is the highest amount of the user’s borrow balance that can be liquidated before the account is closed. This limit is determined by total fund deposits and their liquidation ratios. In general, the liquidity threshold is larger than the LTV. This buffer serves as a safety net for borrowers in the event of changes and volatility in the supplied token.

The interest that lenders earn and the interest that borrowers must pay are decided by the ratio of supplied and borrowed tokens in the market, and the interest that borrowers pay is the interest that lenders earn. 

Lending Pools

There are two types of lending pools on Solend–The main pool and isolated pools.

The Main Pool comprises the majority of Solend’s TVL and has assets that are largely stable with robust liquidity and a low-risk profile. At present, it supports SOL, mSOL, BTC, ETH, SLND, USDT, UST, soETH, scnSOL, stSOL, FTT, soFTT. ORCA, RAY, SRM, SBR, MER. The total supply in the pool amounts to $1.07 Billion. Total TVL in this pool, after discounting the amount borrowed by users, is valued at $650 Million.

Isolated Pools: Isolated Pools are smaller pools used to list slightly riskier tokens such as Locked Staked IN (lsIN) or future tokens such as xSTEP or SAMO. Because these tokens are less liquid and more volatile, they might be exploited and potentially pose a risk if they were to be a part of the main pool. This way, any exploit or risk will only affect the smaller TVLs present in the Isolated Pools rather than the majority of TVLs in the Main Pool. They are separate lending markets with assets that can be used as collateral against each other.

At present, Solend has various Isolated Pools supporting a variety of tokens. They are as follows:

  • Turbo SOL: Launched on Feb 1, 2022. It supports only two assets, SOL and USDC. Both of these assets have LTVs of 90% and a liquidation threshold of 95%. Therefore, users can open a position with 10x leverage, with maintenance leverage of up to 20x.
  • Invictus: Launched on Feb 8, 2022. It supports IsIN, USDC, and UST. IsIN is Locked Staked IN, which earns higher APY compared to Staked IN. it has a five-day unlocking period where users receive lower APY. They can unlock immediately with a 10% fee.
  • Step Isolated Pool: Launched on Feb 16, 2022. It supports xSTEP, STEP, SOL, and USDC. Users can lend these tokens to generate yield or use them as collateral to borrow other tokens. The Step Isolated pool allows the possibility of leverage staking using xSTEP. Users can leverage up to 2x and receive double the staking rewards with minimal liquidation risk. 
  • Bonfida Isolated Pool: Launched on Feb 22, 2022. It supports FIDA, SOL, and USDC. Users can lend these tokens to generate yield or use them as collateral to borrow other tokens.
  • Star Atlas Pool: Launched on March 2, 2022. It supports ATLAS, POLIS, and USDC.
  • Dog Isolated Pool: Launched on March 8, 2022. It supports SAMO and USDC. Other tokens will be added in the future to enable pair trading. 
  • Stable Isolated Pool: Launched on March 25, 2022. It supports USDC, USDT, UST, UXD, USDH, and PAI. As the pool comprises stable coins exclusively, the LTV ratios are set at 95%, which implies that users can open a position with up to 20x leverage. Will facilitate basis trading and arbitrage. 
  • Coin98 Isolated Pool: Launched on April 12, 2022. It supports C98, UST, UXD, USDH, and PAI.
  • NFT Pool: Launched on April 1, 2022, in partnership with Solana Monkey Business and Solvent. The first of its kind on the Solana network, the initiative creates an NFT lending market for users to benefit from improved price discovery by enabling long leverage and shorting.
Source: Solend Blog

SLND

Solend had its IDO in early November, following its launch in August 2021. The Solend protocol introduced the $SLND token that serves as the protocol's governance token. It is awarded to users as a reward for deposits and involvement in the ecosystem. The token supply is limited to 100 Million, of which:

  • 60% is reserved for the community, half of which (30%) is allocated for the Liquidity Mining program (more on that later), and the other 30% is allocated to the Solend Treasury, which is owned and administered by the Solend DAO. The treasury fund will be utilized for insurance, grants, user acquisition, and whatever else the DAO deems necessary. 
  • 25% is assigned to the core team, 15% to investors–10% of which was dispersed in the seed round, and 5% is held aside for additional fundraising if required. 
Source: Solend Token Distribution

Solend offers a lock-up model for investors and the core team. For investors, there is a three-year vesting plan, with the first third vesting on October 1st, 2022, and the remaining vested monthly. The team also has a three-year vesting schedule, with the first third vesting on or after June 1st, 2022.

The SLND token can be used for the following:

  • Earn interest by lending.
  • As collateral to borrow other assets.
  • It can be borrowed against other assets.
  • Users can stake in pools to generate yield. 

Key parameters of the SLND token:

  • Loan to value ratio: 35%
  • Liquidation Threshold: 50%
  • Liquidation Penalty: 20%
  • User Deposit Limit: 100,000 SLND
  • Global Deposit Limit: 1 Million SLND

cTokens

Solend introduced cTokens on Feb 4, 2022. These are yield-bearing deposit receipts. It implies that users can exchange USDC for cUSDC to obtain a tradeable token that also earns interest through Solend. Users can keep this token in their wallets to continue earning interest, or you can send it to other users who will then earn interest on the token.

When a user deposits tokens or takes out a loan on their collateral token, Solend gives the user cTokens. It acts as an IOU token that exists to represent a debt relationship between two parties.

For developer integrations, cTokens opens up a world of possibilities as cTokens are similar to regular SPL tokens in a way that they are easily compostable and compatible with most platforms. 

Source: Solend Medium

cToken ratio is calculated by dividing the total USDC reserves by the cUSDC in circulation. It basically acts as % ownership of the LP.

For example, if the user deposits 1 USDC in a pool of 99 USDC, then the user will own 1% of the pool, which means that when the value of the pool increases to 200 USDC, users’ 1% will account for 2 USDC. 

Liquid Mining & 2.0

It can be simplified as the act of compensating borrowers or lenders with platform tokens in order to promote participation and increase liquidity. It is a community-involvement initiative to drive overall liquidity. When users borrow or provide on the Solend platform, they are rewarded with SLND tokens. 

Source: Solen Liquidity Mining

Solend intends to improve the Liquidity Mining program further by addressing deficiencies in existing programs with Liquidity Mining 2.0. In this new program, instead of instant mining rewards, Solend will reward users with SLND call options. Call options help in aligning the user's incentives with Solend's goals. Users will now want to hold SLND call options for as long as possible till they can profit. 

In the standard Liquidity Mining programs, Solend provided these rewards (i.e., SLND tokens) for free. Users will have to pay the call option value in order to exercise the call option in the new system, which will contribute to the Solana Treasury Fund. The 2.0 program is in the pilot stage at the moment. 

Bug Bounty!

Solend's Bug Bounty program aims to empower community developers to assist in keeping the platform secure and bug-free. The Solend smart contract technology is entirely open-source, and the company encourages community participation by rewarding developers through their Bug Bounty Program. It is in a way similar to how banks account hire researchers and consultants to assist them in ensuring that their systems are hacker resistant, safe, and bug-free in order to prevent theft and fraud. 

As the name implies, it is simply a program in which developers can share any detected vulnerabilities on the platform in exchange for prizes. The program focuses on detecting bugs in order to prevent thefts and the freezing of cash (UI Bugs are not counted). The following classifications are used to give rewards:

For critically severe bugs highlighted where 10% of the value is at risk, Solend offers users up to $1 Million. For high and medium severity detected, it offers $50,000 and $5,000, respectively.

Team Background & Funding

Solend concluded its seed round of $6.5 million in October 2021. Dragon Capital, Polygon Capital, Race Capital, Coinbase Ventures, Alameda Research, Solana Foundation, Epsilon Trading, and Petrock Capital were the venture capital (VC) firms that have invested in Solend in the seed round.

Source: Solend Website

Stani Kulechov (Founder of Aave), Balaji Srinivasan (General Partner at Andreesen Horowitz), Hart Lambur (Co-founder of Uma protocol), 0xMaki (co-founder of SushiSwap), Julian Koh (from Ribbon Finance), and DCFGod (a popular crypto Twitter personality) are among the top angel investors in the Web3 industry backing this project.

Concluding Thoughts

At the time of writing, Solend is ranked 2nd in terms of total value locked (TVL) of $663.63 million, accounting for nearly 12.5% of the total TVL of $4.81 billion locked on DeFi protocols on the Solana network, as per data from DeFiLlama.

Source: DeFiLlama

The Solana-based lending and borrowing protocol has a total supply of $1.14 billion with a total borrowed amount of $467 million. The protocol’s 10 lending and borrowing pools cater to 32 assets like ETH, BTC, USDT, USDC, SOL, FTT, SLND, UST, SRM, and SBR, to name a few. Out of $1.14 million of total supply, the main pool dominates with $1.07 billion, nearly 94% of the total supply.

Source: Solend Dashboard

Whether Solend is able to make a place for itself in the Solana community as Aave or Compound have in the Ethereum ecosystem remains to be seen, but the fact that the total supply on the protocol has surpassed a billion dollars and that it's backed by eminent angel investors (including the founder of Aave) and venture capital firms within the industry is definitely a green flag for its journey.

Find more about Solend here:

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