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:
- Securities lending
- 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.
One of the key roadblocks for these extremely promising, yet somewhat impractical platforms are overcollateralization ratios that are often fixed, and quite high (150% and up). Due to the technical barriers of transmitting plentiful and precise real-time oracle data feeds on chains with comparatively lower throughputs compared to Solana (~50,000 tps & 400ms block times), Solana-based lending protocols accommodate much more capital efficient and flexible collateralization ratios, given proportional liquidity onboarding.
Solana’s lending/borrowing operations are divided into several key primitives & themes throughout the chapter. Several demonstrative examples will be given, to illustrate the capabilities of trustless prime brokerage on Solana.
Primitive I: Supplying Liquidity & Generating Yield
Objectives: Trustless Prime Brokerage
Permissionless Lending | Compounding Revenue Streams
- Web3 Interfaces: Design, architecture & UI/UX naturally deviate across different platforms. Generally, upon entering the app, a user dashboard will be presented with a “connect wallet” button, alongside supported markets & relevant liquidity + yield analytics.
1. Connect a protocol compatible web-wallet (e.g Sollet or Phantom) to enable Web3 functionality and pooling operations.
2. Proceed with supplying liquidity, either by depositing supported collateral, or by adding on to an existing liquidity pool.
3. Confirm that liquidity has been supplied by either looking up the transaction with a Solana-native block explorer, or simply refresh the protocol dashboard for account updates.
4. After depositing assets (10 SOL in this example), the protocol will begin to generate yield for pooled assets, and allow users to borrow on-chain from other lending peers of the network.
*Note: Solana’s high tx throughput and <1 second block finality ensures minimal latency for setting up LPs. Therefore reliable native and third-party explorers, dashboards, and tools typically receive & update real-time data from oracle feeds within seconds or milliseconds.
**Note: If the lending/borrowing platform is accessed through an IP address from a geographically excluded region, transactions may be automatically rejected. This does not result in a loss of funds, as the transaction is not transmitted nor confirmed by mainnet Solana validators.
Primitive II: Permissionless Loans, Debt, & Credit
Objectives: Financial Leverage & Flexibility | Rapid Capitalization
Transparent & Trustless Borrowing
1. Select a supported asset to borrow against existing pooled collateral (e.g stablecoins, ethereum, bitcoin) and the protocol will proceed to match a prospective borrower with a prospective lender.
2. After selecting one’s asset of choice (USDC in this example), the protocol will permit borrowing quantities equal to or below the maximum borrow limit.
* Note: Higher credit utilization inevitably increases probabilities of liquidations and principal loss.
3. After confirming the transaction on a supported web-wallet, the protocol dashboard (Solend in this example) will update balances and display the conditions of the loan.
*Note: Users should monitor borrow utilization closely, as liquidations are triggered automatically, and often without warning once debt totals exceed the protocol’s defined limits.
4. Now that the USDC loan is registered on chain, it will remain outstanding until repaid in full, with interest. Depending on the individual’s risk tolerance and time horizon, and as long as the loan remains sufficiently collateralized, one can flexibly adjust borrow utilization in accordance with market conditions.
Once all outstanding balances have been repaid, users can decide whether to withdraw pooled liquidity and allocate funds elsewhere, or simply earn yield passively by providing liquidity to the protocol.
*Note: As SOL is already the main unit of account on the network, prospective borrower demand is typically much higher for stablecoins. Hence, passive SOL yields are also comparatively low.
Solana Supported Services I: Cross-Collateralization
Objectives: Portfolio Flexibility | Account Stability
Risk Mitigation | Balance Sheet Diversification
- Cross-collateralization facilitates the borrowing of one portfolio against another, reducing the likelihood of liquidation and greatly increasing portfolio stability.
- 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.
Solana Supported Services II: Liquidity Networks
Objectives: Staking Liquidity & Utility | Network Security Increased Staking
Yields | Increased Borrow Limits
- Liquidity Networks are a collaborative approach to increase the utility of staked assets (SOL in this context) locked in individual staking pools.
- 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.
Reference Protocols — Borrowing & Lending
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.
DeFiner [Mainnet] [Solana, Eth, Okex chain]: Privacy oriented lending protocol offering Initial Loan Offerings. ILOs allow listed projects to capitalize quickly by borrowing against their own native tokens as collateral.
Larix [Mainnet][Solana]: Solana-native protocol with dynamic interest rate models and capital-efficient risk management pools allowing for a broader selection of collateralizable assets.
Oxygen [Mainnet][Solana]: Comprehensive prime brokerage services with Serum-based market pricing. Protocol offers various composable services for its products such as cross-collateralization and custom options writing.
Parrot [Mainnet][Solana]: Synthetic debt protocol which can bridge LP liquidity from Eth mainnet onto Solana to be supplied as collateral.
Solaris [Mainnet Alpha][Solana]: Solana-native, Aave/Compound inspired protocol. Essential infrastructure for primitive lending/borrowing/flashloan functionality.
Solend [Mainnet][Solana]: Solana-native algorithmic lending protocol offering competitive, capital-efficient borrowing for long/short positions on margin.
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.
Credit Risk Lending Protocol [Proof of Concept] [Solana, Cross-Chain]: No-KYC lending protocol for undercollateralized fixed rate & term loans. CRLP assigns credit risk on multiple chains sourced with on-chain data.
Everlend [Testnet] [Solana, Cross-Chain]: Lending protocol with Solana-native yield farming & liquid staking features.
Jet Protocol [Testnet] [Solana, Cross-Chain]: Solana-native lending protocol with focus on innovative prime brokerage products, such as market leading, cross-chain, interest rate arbitrage.
Zero Interest Protocol [Testnet][Solana]: Two-token, stablecoin borrowing protocol offering interest-free loans and competitive overcollateralization ratios (110% minimum).