How to Solana — Chapter 1: Lending & Borrowing

Overview

Solana DEX & AMM products are the essential interfaces for further composability & complexity within Solana’s DeFi service suite. After familiarizing oneself with these decentralized commerce platforms, users will often wonder whether more can be done with their capital than simply earning fees from a liquidity pool. Despite continuous processing of massive quantities of on-chain transactions, Solana’s negligible transaction fees are often not lucrative enough for users to be satisfied with simply staking their assets, especially not for single digit APYs.

Solana Lending & Borrowing

After becoming comfortable with pooling and transacting on Solana, lending & borrowing become the next primitives that users tend to experiment with. Lending & borrowing protocols are essential infrastructure for many sophisticated financial instruments that Solana is particularly well-suited to offer. Categorically, Lending & Borrowing fall into the more general suite of prime brokerage services, many of which are not offered to retail TradFi investors. These services include:

  • Custodial services
  • Leveraged trade execution
  • Cash management
  • Structured products
  • Synthetic products (e.g. swaps + others)
  • Direct market access

Prime Brokerage on Solana

Solana’s Lending & Borrowing services are accessed by bridging funds onto the network and depositing assets as collateral. Next, that supplied collateral can either be lent out or used to borrow below a specified maximum “Loan-To-Value” threshold, as defined by the protocol. Given the volatility and unpredictability of markets, undetected exploits & black swan events, protocols that do not adequately mitigate risk, generally do not stay solvent for long, often leading to bankruptcy. To avoid this, overcollateralization is the most straightforward framework for universal access to trustless prime brokerage services.

Primitive I: Supplying Liquidity & Generating Yield

Objectives: Trustless Prime Brokerage

Permissionless Lending | Compounding Revenue Streams

Solend’s homepage displays all available markets, as well as critical analytics e.g on-chain liquidity, supply/borrow limits, and APYs
Anchor Protocol’s dashboard offers a comprehensive overview of protocol analytics and all available markets on the dApp homepage. Users simply need to scroll down to view markets + real-time metrics & yields.
Supplying liquidity to on-chain pools can be done with either singular cryptoasset (Solend, top), or multiple cryptoassets (Oxygen, bottom) deposits. Once liquidity is pooled, users can now explore and access trustless lending & borrowing services.

Primitive II: Permissionless Loans, Debt, & Credit

Objectives: Financial Leverage & Flexibility | Rapid Capitalization

Transparent & Trustless Borrowing

Solana Supported Services I: Cross-Collateralization

Objectives: Portfolio Flexibility | Account Stability

Risk Mitigation | Balance Sheet Diversification

Cross-Collateralization on Oxygen is possible with both large established pools, and small custom pools. Regardless of existing liquidity, Serum’s on-chain order book matching ensures that all supported assets are priced accurately, with near instantaneous updates to price-feeds & analytics.
  • High-throughput, low-latency chains like Solana allow for increasingly precise, real-time risk mitigation; supporting lower overcollateralization ratios and more diverse balance sheets.
  • Solana’s negligible fees and confirmation times enable far more practical & flexible cross-collateralization applications for lending & borrowing. Compared to the deposit or income thresholds required for institutional prime brokerage, 0.1 Sol is more than sufficient to pool, lend, and borrow on-chain, dozens of times over.
  • Solana’s on-chain versatility is indispensable in the development of more advanced protocols capable of minimizing the existing user tradeoffs in decentralized capital allocation such as portfolio flexibility versus suboptimal yields.
  • Eventually, once users can freely lend & borrow across varied and volatile markets, without incurring significantly lower yields or higher interest rates, protocols that can truly challenge the monopoly of CeFi prime brokerages can emerge.
Solend also supports cross-collateralization. Even relatively small accounts with <$100 deposits will have full functionality & flexibility in accessing the protocol’s suite of products & services.

Solana Supported Services II: Liquidity Networks

Objectives: Staking Liquidity & Utility | Network Security Increased Staking

Yields | Increased Borrow Limits

Staking pools often compete rather than collaborate for liquidity. In this example, three independent validators are hosting three non-cooperative pools, presumably with three different SPT tokens. Source: https://gopartyparrot.medium.com/what-is-psol-and-why-it-helps-staked-sol-tokens-60a0b00ac5d6
  • Usually these staking pools will have their own mintable stake pool token (SPT) e.g mSol, pSol, stSol which serves the straightforward purpose of granting extra liquidity, proportional to the users’ value locked (often very overcollateralized).
  • Although the minting of SPT tokens are a more sophisticated means of acquiring liquidity from locked capital, especially compared to fixed staking APYs, fragmented SPTs are still a suboptimal arrangement for unlocking maximum utility.
  • Consider dozens of staking pools with independent TVL figures and corresponding SPT tokens. These pools could unlock far more favorable lending/borrowing terms if collective SPT liquidity was composable & shared, as opposed to fragmented & standalone.
  • As a network like Solana adds more mainnet validators in pursuit of greater decentralization, composable services with proper incentives are essential in maximizing the number of collaborative, good actors on the network.
  • One of these composable services is Parrot, a hub for depositing the various different SPT tokens in order to mint a single SPT token (pSol) with greater utility, and more favorable borrowing terms that result in combining TVL from fragmented SPT networks.
  • Liquidity networks are a service with many viable architectures. Solving for optimal incentivization parameters is an often complex and unintuitive problem at best, and an impossible one at worst. Solana’s capital efficiency certainly makes unifying an ecosystem with hundreds or thousands of SPTs more practical, however only time will tell which solutions work best.
Parrot protocol functions as a hub for depositing rogue SPTs. Independent staking pools can combine liquidity by minting Parrot’s pSOL SPT token. The corresponding increase in TVL rewards pSOL minters with increased utility, better APYs, and more lenient overcollateralization requirements compared to the user’s original SPT deposit. Source: https://gopartyparrot.medium.com/what-is-psol-and-why-it-helps-staked-sol-tokens-60a0b00ac5d6

Reference Protocols — Borrowing & Lending

Mainnet Products:

Anchor [Mainnet] [Terra, Solana]: Savings protocol with stable yields on Stablecoin deposits. Lenders can borrow and earn yield through bonded assets, tokenized representations of staked collateral.

Pre-launch & Conceptual Products:

Apricot Finance [Testnet][Solana]: Lending protocol with 2-hour grace period for underwater loans. Ancillary services e.g margin trading with up to 9x leverage.

A team of former consulting, Wall Street, private equity, government, and corporate veterans accelerating the blockchain revolution