Lending and trading platforms are at the heart of DeFi; they provide integral services not just for users, but for projects as well. Teams benefit immensely from being listed on lending and trading platforms (whether they’re trying to increase liquidity via trading or utility via lending integration), yet the process of being onboarded onto such platforms can vary drastically between DEXs and lending platforms.
What DEXs Got Right
Integration onto a decentralized exchange is one of the first steps for teams trying to drive liquidity to their token and provide users with a means of swapping in and out, without reliance on centralized exchanges.
This tends to be a fairly seamless process. Teams have plenty of secure choices, plus it’s possible to gain exposure on nearly every major chain. Regardless of which exchange(s) they choose to list their token, the procedure is rather similar, with the entire process done directly through the UI, making it intuitive and user-friendly. By simply adding the contract address and funding the LP, teams can open their token up to trading in a matter of minutes.
What Lending Protocols Got Wrong
That level of simplicity does not extend to lending protocols. Unlike decentralized exchanges, traditional pooled lending platforms must be hyper-cautious when onboarding new assets, as a single faulty asset can result in the draining of an entire protocol; the effect of cascading liquidations on Wonderland’s $wMemo is a prime example of the inherent risk that comes with onboarding assets under the permissioned pooled model.
In an attempt to avoid such catastrophes, current lending protocols sideline themselves to a litany of opportunities. In their attempts to be conservative for the sake of protecting users, lending protocols have constructed stringent onboarding requirements. Most lending protocols require assets to use a Chainlink oracle as a prerequisite to being onboarded to a platform, but this leaves most projects ineligible. Though DAO governance was intended to protect lenders, the current system limits user autonomy by making decisions for users, confining their capability to pursue potential opportunities.
Alternative lending systems have been tested to avoid such risks, with limited success. One of the most popular alternative lending models recently is the use of isolated lending silos. Isolated lending models achieve the ability to onboard a wider array of assets without putting the entire protocol at risk, but they must trade this extra protection for reduced usable liquidity.
Under a silo lending model, each lending market is isolated from others to avoid potential fallout across the protocol if one of the assets is devalued. While this design limits potential fallout, it also limits usability; borrowers face difficulty taking out large loans when liquidity is fragmented between various silos; many pools face a chicken-and-egg dilemma, where lenders don’t want to deposit to a pool with limited borrowing demand, but borrowers can’t take loans from pools with minimal lent assets to demonstrate increased demand.
While permissioned pooled lending protocols with active governance benefit teams with significant liquidity once onboarded and isolated lending protocols offer a more seamless onboarding experience, neither experience is as fluid as on DEXs, where teams can instantly create liquid markets.
Bringing the Simplicity of DEXs to Lending
Sturdy V2 will unlock the full potential of lending.
Unopinionated Base Layer: Permissionlessly Deploy Lending Markets
DeFi is constantly evolving and being iterated upon; Sturdy V2 has learned from its predecessors and delivers true permissionlessness and composability without falling victim to the shortcomings of earlier lending protocols.
The upcoming iteration of Sturdy enables projects to seamlessly deploy lending markets for their token(s), finally bringing the simplicity of DEXs to lending! Rather than vying for liquidity between other siloed lending pairs, like on other isolated lending platforms, lending pairs on Sturdy can be fully liquid from the jump by whitelisting on existing aggregators.
Two-Tiered Architecture: Instant Liquidity
Sturdy incorporates a two-tiered architecture to avoid the liquidity fragmentation that has kept silo-lending models operating at scale. Typically, silo-lending models suffer from fragmented liquidity; lenders deposit across various silos, so borrowers cannot take out substantive loans from any single silo, reducing the model’s effectiveness and preventing markets from growing.
While siloed lending pairs on Sturdy operate as mini-lending markets, with a single lending asset and a single collateral asset, they benefit from pooled liquidity via the native aggregation layer. Thanks to Sturdy’s aggregation layer, liquidity goes where it’s needed, and by whitelisting a new siloed lending pair to an existing aggregator or creating a new aggregator with new and preexisting siloed lending pairs, lending markets can be liquid from launch.
Aggregators on Sturdy autonomously shuffle liquidity between whitelisted siloed lending pairs, according to utilization rate, so plugging into an existing aggregator provides new lending pairs with substantive liquidity from the launch. Since aggregators are permissionless to create, projects can even spin up aggregators featuring common lending pairs to quickly drum up liquidity. New aggregators are able to utilize the liquidity in existing siloed lending pairs, providing instant liquidity to the aggregator and any new lending pair(s) included in the aggregator. Through pooled liquidity between risk-isolated lending pairs, freshly created aggregators on Sturdy can earn compelling yields from the jump; no need to wait for new liquidity to come in or compete for liquidity with other siloed lending pairs on the platform.
The Next Generation of DeFi: Permissionless & Unopinionated
Permissionless, immutable primitives solve many issues facing current DeFi lending protocols; projects can seamlessly build on top of them without waiting for time-consuming governance processes.
This model challenges many of the old assumptions of lending protocols, choosing true permissionlessness over active governance, and reimagining lending markets to avoid liquidity fragmentation.
Sturdy V2 will serve as an unopinionated, permissionless primitive offering true composability to projects across DeFi. By reimagining how lending protocols operate and doing away with time-consuming governance processes, projects will benefit from instantly liquid lending markets for their tokens.
