Permissionless Pooled Lending: Bringing Sovereign Risk Management to DeFi

The DeFi lending landscape

Sovereign risk management is at the core of the DeFi user experience. The promise of DeFi is to enable users to take control of their funds without relying on third parties to dictate where they can and can’t allocate their assets. Yet the current DeFi landscape falls short of empowering users to customize their risk exposure, with governance and insiders fulfilling the role played by centralized parties in TradFi.

Take Aave V3, for example; all users lending USDC are earning 2.81% APY and are exposed to a common set of collateral assets. Yet surely, many prospective users would be willing to lend against additional collateral assets if they earned 4% APY. Conversely, some users would prefer only to earn 2% if it meant not being exposed to specific collateral assets.

Nearly all DeFi lending protocols follow this logic, where the set of collateral assets is universally applied to the entire protocol, restricting users from being able to express their individual risk preferences. Adding insult to injury, the process of onboarding new assets tends to be slow and hyper-cautious as a single faulty asset can spell disaster for the entire protocol.

A handful of projects have tried to circumvent the rigidity of permissioned pooled lending by isolating risk through separate pools, but this approach comes with its own drawbacks. Lenders have to actively manage their position to maximize yield as the rates among pools fluctuate. Bootstrapping new pools becomes a chicken-and-egg problem, where borrowers are waiting for lenders, and lenders are waiting for borrowers. As a result, pools tend to lie empty with liquidity fragmented.

Rather than select from a multitude of isolated pools with fragmented liquidity or rely on the protocol to mitigate risk via selective onboarding, users should be able to select which assets can be used as collateral against their lent funds.

Sturdy V2

Sturdy V2 tackles this issue head-on by introducing permissionless pooled lending. Under this model, users can lend to a pool that borrowers can draw from using a variety of collateral assets (much like existing pooled lending protocols). Yet at the same time, introducing a new collateral asset will be permissionless and avoid the chicken-and-egg problem associated with isolated risk lending protocols.

Sturdy V2 accomplishes this via a novel two-tiered architecture paired with a variety of new features (including just-in-time liquidity and zk optimization). This unique approach encourages shared liquidity while granting users unprecedented control over their risk exposure.

Lenders will be able to choose riskier assets to earn potentially higher yields or opt for a more cautious path that aligns with their personal risk. In other words, lenders will be able to select exactly which collateral assets they’re exposed to without the drawbacks of existing isolated lending markets, granting users truly sovereign risk management.

Want to learn more about how Sturdy V2 will work? Stay tuned; we’ll be sharing more details soon!

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Sturdy V1: https://sturdy.finance/