Why we invested in Jet Protocol

Introduction

We are excited to announce our investment in Jet Protocol, a breakthrough lending protocol leveraging the high speed and low cost of Solana. There are many amazing DeFi projects being built on Solana at the moment, however until now there has not been a base borrow/lend protocol allowing market participants to borrow against their Solana assets. This fundamental layer will accelerate DeFi adoption on Solana by not only providing lend/borrow facilities but also, via bridges, allowing cross-chain interaction and arbitrage; bringing a new dimension of price discovery to DeFi assets, powered by sub-second block times on Solana. In this note we will give an overview of the importance of lending to a DeFi ecosystem, why Solana is primed to be the leading DeFi infrastructure and why we invested in Jet as the base layer borrow/lend protocol on top of this infrastructure.

Primer on crypto borrow/lending

Analogous to hiding savings under a mattress, HODLing crypto assets in a wallet is one way of keeping assets safe until they appreciate in value, however, it is not very capital efficient. Here, credit facilities can come into play. As with traditional banks, DeFi borrow/lend protocols allow savers to receive interest on their holdings while giving borrowers the opportunity to unlock the value of their digital assets by using them as collateral for a loan. Lending is crucial for any market, including crypto; it puts assets to work, delivers investment yield for lenders and allows new protocols to grow and flourish. When consumers and businesses can borrow money, economic transactions can take place efficiently and the economy can grow; this is no less true for crypto-economies. Without lending and borrowing, assets lie stagnant and protocols may falter without a much needed line of credit. The old adage “money makes the world go round” is correct but incomplete; it is more accurate to say that credit makes the world go around.

  • 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.

Trends in DeFi lending

While over-collateralization helps protect the market against volatile swings, these ratios remain fixed and quite high (often 150%) due to slow oracle updates and computational power.

Source: DappRadar and Defistation.io
Source: DappRadar and Defistation.io

Problems in DeFi

Cost

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

Solana as a solution

Solana reigns supreme on transaction cost vs. validation and is a prime candidate for DeFi projects seeking a reliable, fast and cheap layer 1:

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

Jet Protocol

Jet protocol was announced in April 2021 by founders @wilbarnes and @jrmoreau as a lending and borrowing protocol on Solana, stating that “the mission of our community driven platform will be to utilize the chain’s unmatched speed and low fees to push the limits of on-chain DeFi lending, [anticipating] broader interest in more efficient trading than other chains, with tighter cRatios, enhanced oracle data, and more efficient CEX-like liquidations”.

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

Solving issues in DeFi

As explained above many of the issues with current DeFi lending stem from slow transaction speed, price discovery and computation. Leveraging Solana’s raw computational power with innovative and fast oracle solutions, Jet will provide better liquidity management, more innovative dynamic pricing from higher market data ingestion, and the ability to handle liquidations more gracefully via sequencing and confidence analysis of available liquidity during times of stress. All of which are infeasible on Ethereum. These speed improvements provide further tangible benefits like tackling the high collateralization requirements: Jet will introduce dynamic collateralization ratio pricing, allowing ratios to be adjusted based on the level of volatility in the system, meaning during periods of low volatility, collateralization ratios can fall to more reasonable levels, freeing up capital and reducing the burden of borrowing. As explained by Jet: “To put it plainly, with Solana’s throughput, the protocol can ingest data quicker, rendering price and interest updates more frequently during times of market volatility, propagating actionable data across the network to all market participants in seconds. And inversely, during periods of inactivity, the protocol relaxes.”

All roads lead to Jet

We believe that the killer use case of Solana will be DeFi, with protocols building exciting new tools leveraging it’s sub-second transactions and low fees (simple token transfer fees can be as low as $0.00001). We believe that Jet will lead to more efficient lending and borrowing markets as well as price discovery. Jet will allow users to move assets from other chains over to the protocol as well as deploy arbitrage strategies to equalize rates across chains and protocols. This is achieved via Wormhole and RenVM bridges and is a great step forward in market rate consistency across DeFi.

Source: Compound, Aave, Venus, Cream

Co-pilot: simplifying DeFi

Managing collateralization across assets, finding optimal deployment strategies for maximum yield, managing positions in times of volatility — current solutions are not very user friendly and often the user is flying blind and at the mercy of the market. What if there was an automated AI that could supercharge DeFi decisions. This is the plan for Jet’s Co-Pilot function.

  • 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.

Team

Founded by Will Barnes, a talented blockchain developer with extensive experience in the space including at MakerDAO and Consensus, and James Moreau a community expert with experience at Blockdaemon and ConsenSys. They have the experience in lending, the technical chops in blockchain and the experience in community management to make a community first, super-powered lending protocol on Solana.

Governance first approach

Leveraging experience at MakerDAO, the Jet team is creating a protocol for all from the outset. Jet will include a governance “terminal,” allowing anyone to execute changes and complete upgrades to the protocol if sufficient votes are secured. The endpoints of this terminal will be aggressively defended, with time-locks, early adopter token agreements in place to counter rogue proposals, and steep proposal quorums on launch, that will be relaxed over time as it’s demonstrated the protocol is battle-tested and hardened enough to sustain governance attacks.

Tokenomics

Most JET tokens are locked up for a long time (3 years), which leads to well-aligned incentives for everyone involved: the team, investors, community of users, and governance participants. Additionally, a large portion of the unlocked tokens are at the disposal of the DAO, and will require governance input on how they are allocated by stakeholders and community members.

  • 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.

Conclusion

We believe that Solana is the future of DeFi but still lacks basic DeFi functions and product integration with other chains. Jet protocol solves many of these key issues and has the potential to become a cornerstone service in DeFi, leveraging high throughput, low cost transactions, ultra fast data feeds and efficient price discovery to enable the true potential of DeFI to be unlocked. We look forward to helping Jet accelerate in the Asia markets and will continue to provide any strategic support they need.

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Sino Global Capital

Sino Global Capital

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