Why we invested in Jet Protocol

Not financial advice.

Introduction

Primer on crypto borrow/lending

When investing in crypto, one of the biggest challenges is cashflow management: having the needed “dry powder” to take advantage of a short term opportunity. There is nothing more inconvenient than cashing out to cover short-term costs. This is just one example of where crypto lending can solve a major headache.

How it works

In a trustless transaction like crypto lending; to mitigate default risk as well as the liquidity risk caused by price volatility of the underlying collateral, borrowers need to provide collateral over and above the value they would like to borrow. The borrower places collateral in a smart contract and, in return, is allowed to borrow some lesser amount of another asset provided by the lender. This process is known as over-collateralization. Over-collateralization may be a strange concept for borrowers accustomed to traditional bank loans, however this inconvenience brings the benefit of more open access to DeFi services for all. Furthermore, given that the users chose to borrow instead of sell their assets in the first place, they likely expect an increase in the value of the underlying collateral assets and do not mind locking them up for the duration of the loan.

Liquidations

Despite over-collateralization, it is not uncommon for riskier assets to fall in value below the specified minimum requirement. When this happens, in order to safeguard the integrity of the lending market, liquidation occurs. Liquidation is necessary because rational borrowers are now incentivized to default and take off with the loaned asset; from their perspective, why return $100 of USDT for $85 of ETH? This potentially leaves the lenders footing the bill. If this happens on a large enough scale, the lender will fail and the market will crumble.

If the collateral is not topped up to the pre-agreed minimum by the borrower, third-party liquidators can trigger a function that sells the collateral off, levying a hefty liquidation fee on the borrower. Let’s look at a example:

  • A customer borrows an asset X at a 150% liquidation ratio, requiring a minimum $1.50 of collateral value for every $1 of X borrowed.
  • If collateral value falls to, say, $1.30, liquidation occurs. A third party liquidates the position (sells the collateral, usually at a small discount) to cover the original $1 borrowed, takes a hefty fee for the trouble, and returns the remainder to the borrower.

The liquidation penalty incentivizes borrowers to keep their positions above water while incentivizing third party liquidators to monitor risk and liquidate untenable positions, thus keeping an orderly market. For a more detailed analysis of how liquidation works in MakerDAO, see https://medium.com/@natanbaredes/makerdao-cdps-liquidation-analysis-28ee462cf43e.

Trends in DeFi lending

This has led developers to search for other solutions. According to DappRadar’s Q1 2021 industry report (https://dappradar.com/blog/dapp-industry-report-q1-2021-overview), as of 2021, about 90% of transfers on the Ethereum network come from the top 10 DeFi distributed apps, showing that Ethereum is mostly all about DeFi in 2021. Ethereum remains the significant blockchain within the DeFi ecosystem at the moment:

Source: DappRadar and Defistation.io

However, it is notable that users seem willing to give up some decentralization for more speed in their DeFi apps. According to the report, many individual BSC Dapps overcame top Ethereum competitors in recent months:

Source: DappRadar and Defistation.io

Problems in DeFi

The Ethereum network was designed to raise it’s fees with more users. The explosive growth in DeFi without the requisite scaling in network throughput has caused sharp increases in gas prices and thus average transaction costs:

High gas fees are an obstacle to DeFi adoption as they make experimenting with certain strategies like yield farming uneconomical for smaller investors. For lending in particular, higher fees are an obvious obstacle for smaller transactions and extend to the execution of liquidation smart contracts.

Siloed assets

As assets become siloed on different chains, disparity arises in yields and lending rates, creating inefficient lending markets. Such disparities in product pricing is a result of inefficient allocation of funds caused by slow base protocols and patchy interconnectivity across the DeFi industry as a whole. This impacts the ease of composability of DeFi legos, a key benefit of DeFi over TradFi.

Speed

DeFi has not yet been able to offer a similar breadth of services as TradFi due to speed limitations. Slow computation leads to many issues including:

  • Poor price discovery of complex derivative assets
  • Disorderly liquidations on loans
  • Slow trade execution which limits trading strategies

Furthermore, in times of stress the floodgates open and there is a rush of transactions to the network, all competing on gas fees, resulting in some transactions taking an hour or more to be included on-chain, and some failing altogether. This creates a number of unique issues for crypto lending such as orderly management of liquidations, ease of entry/exit of loans, real-time pricing of collateral etc.

Solana as a solution

Source: https://twitter.com/Solana_Mates/status/1382692005659168782

Taking Solana, Binance Smart Chain and Polkadot as recent popular DeFi chains, we see the true payoffs for sacrificing decentralization:

It’s clear that Solana is the best candidate for building fast DeFi applications. However before this can happen, some basic infrastructure needs to be in place. Serum provided the plumbing necessary for settlement — what is needed as a next step is a core lending protocol which can put Solana assets to work via lending, expand into new products and bridge to other chains. Enter Jet.

Jet Protocol

Efficient, user first dev cycle

The Jet team is passionate about open source collaboration and user feedback. Originally building on the Solana token lending program (https://github.com/solana-labs/solana-program-library/tree/master/token-lending) the team realized that open source was important but needed a faster, iterative dev cycle over simply pushing changes to an existing repository. As such, the Jet team completely refactored the lending model in Anchor. For more info check out their Github: https://github.com/jet-lab/.

Features and roadmap

Lending products will start with a cross-margined lending protocol extendable via API. As devs themselves, the Jet team realize that giving developers and other market participants a seamless API to interact with the protocol will further drive adoption and customization of Jet. The current MVP product provides Solana market participants a place to deposit and borrow against their assets, manage their debt positions, and take positions on the interest rate differences between other layer 1’s such as Ethereum, Terra, and others. Beginning with these base operations we see the true capability of Jet on Solana to revolutionize DeFi services by offering more complex products in the near term based on these fundamental functions. These include:

Leveraged borrowing automated position management.

Extremely low transaction costs relative to Ethereum allow positions to be updated with speed and efficiency. Users who wish can give approval for the protocol to manage and automatically rebalance their leveraged positions akin to the solutions DeFiSaver provides to MakerDAO vault owners.

Secondary markets for interest rate speculation.

When a user deposits an asset into the protocol, they are returned a token representing their base deposit and a token representing their interest earned. From there, the user can trade their deposited interest rate against other interest rates on Serum’s central limit order book.

Liquidity provisioning for senior and junior debt positions.

Jet will introduce a series of complex structured risk products on Solana, realizing the senior / junior debt proof of concept first explored by the team in the initial Solana Wormhole hackathon in November 2020.

https://github.com/wilbarnes/solana-structured-products

The team went on to illustrate some examples of more complex strategies that require the speed and low cost of execution of an interconnected arbitrage hub like Jet:

https://github.com/wilbarnes/solana-structured-products

Jet is leading the way in bringing products above and beyond the standard of TradFi, to DeFI.

Solving issues in DeFi

The faster oracle feeds and pricing mechanisms offered by Jet are leveraged to lower collateralization ratios for some assets. On that alone, Jet can directly compete with higher cRatio protocols like Compound etc, allowing for greater capital efficiency.

Given its ability to leverage the Serum ecosystem, liquidations on Jet are more orderly and allow for more control than a standard liquidation bot. Liquidation is essentially paying down debt then liquidating collateral and, naturally, there are cases when liquidators may not want to be stuck with the liquidated asset on their books. Using Serum as a backend to push or swap (Anchor Serum Swap) liquidations, the liquidator can immediately change back to the original asset used to pay the debt, at a low cost, essentially enabling risk free liquidation.

Swapping transactions incur a fee, though quite low, so to incentivize all stakeholders in the protocol; Jet may introduce MSRM holder fee rebates in the future.

All roads lead to Jet

The current disparity in borrowing rates among different chains creates potential arbitrage opportunities for a centrally connected high speed protocol like Jet:

Source: Compound, Aave, Venus, Cream

Interest rate differences will be priced in terms of interest bearing tokens (e.g. Compound’s cToken, AAVE’s aToken, Anchor’s interest rates). Using Wormhole and RenVM, Jet will allow market participants to equalize cross-chain interest rates through arbitrage and market-making of the interest bearing tokens. Funding payments will be netted across chains depending on the specific contract, of which will be initiated and managed by token holders.

The speed of execution provided by Jet combined with the necessary cross chain channels incentivizes liquidity provision on the protocol and the greater Solana ecosystem as a whole. What’s more, these users can leverage the existing tools of the ecosystem (e.g. Serum, Raydium) to optimize their strategies, e.g. lenders can sell their lending tokens (given on deposit of assets on protocol) on the Serum DEX. The efficient pricing of opportunities this creates will have positive impacts for the industry as a whole and bring further growth to Solana.

Ease of use

A common dilemma for DeFi application developers is on how much of the complex blockchain “nuts and bolts” should be abstracted away from user facing functionality. While its important to give experienced crypto native users the ability to fully leverage the tools of the protocol (and Jet is planning some pretty cool stuff), for experts and newbies alike, the team realize that the ultimate success of Jet Protocol and any other “killer app” is dependent on ease of use. The goal of any decentralized system is mass adoption. How do you get mass adoption?: low cost of entry in terms of the knowledge needed to use the platform. An initial sneak peak at the UI shows a sleek interface, clear summary dashboard and intuitive access to features via sidebar. The main goal of the UI is that users can get a gist of the features of Jet from the interface alone.

Cockpit — View all assets and explore details and use deposit, withdraw, borrow & repay functions. Competing protocols often have an overload of information and can be daunting for new users. In Jet’s “Cockpit” we see a simple summary of funds deposited, borrowed and an overview of your current collateralization:

Copilot steps in when it finds any errors:

Deposit and borrow:

Clear and simple UX— You’ve deposited DAI and want some back? Click redeem:

Also a dark mode for accessibility:

Co-pilot: simplifying DeFi

Overview and long term goals:

  • Look at the market (current APYs etc), check current asset holdings and financial position and recommend a good sequence of transactions.
  • Will be opt-in and users can read through the recommendations for oversight or learning purposes before confirming.
  • Once confirmed with the click of a button, the back-end will execute a number of trades depending on recommendation.
  • May deploy to highest APYs based on deposits, recommend whether to deposit assets or repay debt to bring collateralization back in the green.
  • Co-Pilot is a manifestation of a key belief of the team: How can Jet help in maintaining financial wellbeing of users?
  • Long term will be a fully automated AI function on top of Jet.
  • Co-pilot can appeal to users of all experience levels and can automatically form complex deal structures without users building themselves. It’s even handy for power users to show strategies they may have missed. No matter what your workflow is, Jet wants to make the process as easy as possible.
  • Given the speed of the underlying infrastructure, there is more certainty in execution and recommended actions will only be executed if all trade sequences are executed.
  • Non-invasive and opt-in. Co-pilot would only suggest or “kick-in” e.g. if in duress. Or can opt-in and receive suggestions depending on market conditions. As you get closer to the collateralization limit, Co-Pilot will alert users more and more to ensure they are aware of the danger.
  • In the future, in times of stress Co-Pilot can recommend a set of actions to bolster a position (e.g. swap SOL for USDC to pay debt). The idea is to make sure the user is aware of their situation pre-liquidation, to avoid the fees and inconvenience of liquidation, and give them as many options as possible to avoid it. Few protocols have the user’s financial wellbeing so prioritized nor offer such control over their finances. No more need users be at the mercy of slow pricing updates and chaotic liquidations.
  • Co-pilot essentially speeds up the user’s ability to rectify negative situations. When markets are moving against you, fast, many users may not want to manually dig their way out. There is an element of stress and a potential for human error. In the future there are multiple possible ways Co-Pilot could simplify the situation: potential for an “Eject” function to clear out of all positions immediately (try doing that on other protocols), auto rebalancing, alerts for deposit, strategic sell-offs etc. In the future users can authorize Jet to do these automatically.

We believe that Co-Pilot has the potential to be a revolutionary breakthrough in DeFi financial management and look forward to seeing the toolset develop.

Team

Governance first approach

The team envisages an inclusive governance ecosystem on the protocol. Anyone will be able to stage a vote and change anything on Jet; swap out modules etc. As long as it can get enough votes to surpass the last vote, the proposal will enter a waiting period (~24 hours). If the submitter can defend (remain the highest voted) proposal, it will be cast. There’s will likely be lots of fiery public debates which is healthy for a growing protocol.

We at Sino believe that community ownership and engagement is key to a project’s success and are delighted that the Jet team has put the community first with meaningful inclusion at root level, above and beyond a simple multisig.

Tokenomics

  • The fixed total supply of JET tokens is 1,700,000,000.
  • Initial Circulating Supply: 156,257,200 JET.
  • 25% of tokens to team & advisors, 0% unlocked at the 12 month cliff, and the rest vesting linearly over 24 months.
  • 15% of tokens to seed investors, 0% unlocked following a 12 month cliff, with the rest vesting linearly over 24 months.
  • 10% of tokens to follow-on investors, 0% unlocked following a 12 month cliff, with the rest vesting linearly over 24 months.
  • 3.06% of tokens to Ascendex IEO + trading capital for market maker, 100% unlocked at TGE.
  • 25.47% of tokens are under control of the DAO, 3% unlocked at TGE and the rest vesting linearly for 24 months. The rationale for lower % TGE unlock here is to prevent governance attack of DAO tokens. 21.47% of tokens are reserved for direct project contributors, the “dev fund”, 25% unlocked at TGE and the rest vesting linearly for 24 months.

Jet are building a resilient, durable lending protocol and Sino is ecstatic to be supporting the Jet team and community. For more info on tokenomics see https://medium.com/jetprotocol/jet-tokenomics-lockup-and-our-long-term-vision-430a1fbe119f.

Conclusion

Research by @dermotmcg

Disclaimer: This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained here constitutes a solicitation, recommendation, endorsement or offer by Sino or any third party service provider to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction.

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