Deep Dive: Solend Isolated pools and cToken
Bringing isolated pools on the Solana chain to put power in the hand of users, once again!
Introduction
Last year was wonderful for the Solana ecosystem. After lots of innovations and building in the space, Defi on Solana is taking its shape.
If you have been following this space closely, you know that in the last year, the foundation for the Defi products on Solana is getting built and is looking quite strong!
We have already observed in Defi ecosystems on other chains that some aspects like AMMs (Automated Market Maker), DEXes (Decentralized exchanges), tokenization of TradFi aspects (like interests on loan, etc.) are important aspects of sustainable and secure Defi.
With Solana’s differentiating features like fast transaction, security, and market-proof adoption, it is the best contender for becoming mainstream Defi blockchain. To bring Defi on Solana, a protocol has been working day and night to bring the best products and features to its users.
They have already accrued enough TVL to find the product-market fit after launch in August 2021. They are right now the biggest lending and borrowing protocol on the Solana blockchain.
It’s called Solend.
What is Solend?
Solend is the biggest decentralized protocol for lending and borrowing on Solana.
Solend enables users to earn interest on their crypto assets, borrow, get leverage, and even short other assets. As of this writing, the total value locked (TVL) in Solend is more than 660 million dollars. This deep dive on Solend explains the protocol in-depth with the basics of lending and borrowing. I would highly recommend you to give it a read after this blog.
Recently, Solend has launched two interesting products i.e. isolated pools and cToken. For the Solana Defi ecosystem, both of them are novel and exciting additions in a lending and borrowing protocol.
These new products enable new investment strategies and risk/reward manipulation for users on the protocol. It’s important to understand them even further in the making.
What are isolated pools?
Isolated pools are independent markets for lending and borrowing with assets that can be used as collateral.
This is the opposite of a single cross-collateral pool in which any asset can be borrowed against any other. Where the risk of each asset affects the other and the protocol too. And your protocol is as strong as your weakest asset.
That’s not the case in the isolated pool. As the name suggests, isolated pools act like isolation or quarantine for assets. The risk of any asset does affect any other asset or protocol, but only that particular pool.
In other words, it unlocks a world of possibilities for asset listings and risk-reward play.
Product Walkthrough
6 Pools are live as of this writing. Each pool has its own assets and risk/reward mechanisms. Each pool with its own risk/reward and liquidation mechanisms.
Let’s understand terminologies that will help you understand the risk/reward of that particular pool.
Net Value is the value of your account. It is calculated as supply balance - borrow the balance.
Borrow balance means the sum of all assets that you have borrowed from that pool.
The liquidation threshold is the limit where your collateral will be eligible for liquidation. If you do not pay back the loan, your assets will get liquidated. This is marked by the red in the bar below the Borrow balance. Ideally, you have to lower your borrow utilization to minimize this risk.
Borrow limit is the maximum value you can borrow. It’s marked by the white in that same bar. To increase this limit, you should ideally supply more assets.
Each asset supplied increases your borrow limit by a percentage of its value.
As you saw, isolated pools are transparent to the user and based on the truth of the algorithm. There are other several reasons why isolated pools bring so much value to the users and Defi protocols:
Why are isolated pools so important?
Open-source, for real.
Isolated pools democratize the process of accessing yields, leveraging & providing liquidity. It enables everyone to create a pool and leverage upon the assets.
Even though Solend does not have a public permissionless process for pool creation at the moment since they are just getting started with the isolated pools.
It makes sense to do so because creating a pool upon any shitcoin which gets dumped would affect the credibility of Solend, as a protocol.
In the future when people would be able to create their own isolated pools upon their assets, the protocol would be mature enough to not let the failure of one pool affect the protocol. On top of that, one isolated pool won’t affect other pools in any way.
Standing strong even after the failure of one pillar
The risks of one pool don’t overflow into other pools since they are not dependent on each other in any sense. Such that, if there was only one pool all the assets in that pool would be at risk by the listing of any new asset.
Now, in isolated pools even if Pool 1 gets breached because of an asset, Pool 3 did not get affected at all. For sure, users of Pool 1 will have to face losses. But at least the protocol is still intact and can keep going.
Rather in single cross-collateral protocols, if anyone of the asset causes a breach, the whole network would be affected if not TVL of the protocol will reflect the failure.
Network effect in the ecosystem
As Solend can list any asset from the Solana Defi ecosystem, it increases the positive-sum network effects in protocols.
All Solana dApps with tokens can leverage Solend isolated pools to increase the use-cases and capital efficiency of their tokens.
These isolated pools will increase utility for long-tail assets alike.
Increased capital efficiency
Loan-to-value (LTV) ratio means the amount you can borrow based on the value of your collateral. For example, You have 1000 SOL with 1 SOL = 1 USDT, for simplicity. You want to borrow USDT against it. If the LTV is 75%, you can borrow 750 USDT.
In isolated pools, the LTV ratio can be increased since there is more bandwidth to play around with risks.
Lenders in these kinds of pools could expect higher rates with higher risk. They will explicitly sign up for this higher risk, higher reward opportunity.
What are cToken?
This is the web3 world. Here, we play around with tokens whenever possible, even with interest.
cToken or collateral token represents your deposit in the protocol. You can also see this as your interest on top of your deposit. The interest on your lending asset or loan is accrued in the cToken.
Whoever is holding this token will be earning interest on this. If you transfer it to me, then well, I’ll be earning your yield. This token represents your deposited asset and your interest earnings on it now.
For developers too, cTokens are easy to workaround. Because they are SPL tokens, which are composable and compatible with just about everything.
Solend provides grants for developers building upon Solana. Other than that, they also provide a developer portal to help devs with all the important resources in order to support their projects.
cToken were started by Compound protocol for the same use case. Afterward, they have been popularized and widely used for different use cases among all lending and borrowing protocols.
In order to mint and redeem your cToken, you have to connect your wallet on the Solend portal -> https://solend.fi/ctokens
Depending upon your deposit, you can mint cTokens.
And depending upon your cTokens, you can then redeem your collateral with the interest earned by depositing your cTokens.
They have made it a piece of cake for users to monitor their interests and rewards on the protocol. And cToken has enabled them to do so.
Conclusion
With isolated pools and cToken launch, it’s quite evident that Solend has been taking steps quite fast and responsibly towards building innovative features. It ensures sustaining its position as the most trusted Defi protocol on Solana.
That’s pretty visible in the trust of the community. Their shipping pace is commendable and the features in their roadmap are promising for the protocol.
Although, the standards to list new tokens on Solana are stricter than on Ethereum. This does not eliminate the risk of manipulating a poorly designed token and attacks are still possible. These latest launches by Solend solve this problem to some extent.
With a good network effect for other protocols. Isolated pools have increased capital efficiency and utilization of lots of assets in the ecosystem. As it will in the future too.
This year would be very exciting to observe the Solana Defi space, pretty excited!
Disclaimer: Not at all a financial advice. DYOR!