Solana’s Savings Account Protocol

Lending platforms are currently exploding on Solana with Solend hitting $1.1 Billion in total value locked (defillama.com).

Solend excels as an underlying lending protocol which other DApps can build on top of. However, it is not designed for everyday users to interact with directly.

Users who borrow on Solend must overcollateralize well over the health ratio and monitor their position 24/7 and can still be liquidated in the case of network outages or flash crashes. A retail user on Solend can never fully protect against liquidation.

On top of this the borrower pays an interest rate (0–7%) and pays the opportunity cost of yield on their deposit (10-20%). This adds up to a cost of borrow to the user of roughly 10–25%.

This doesn’t matter for bots and protocols that quickly move positions but is costly to the retail user.

Thus there’s a critical need a retail borrower friendly lending platform.

We believe Solana needs a self-repaying loan protocol with 0 liquidation risk. Users can borrow and withdraw at any time, earn yield on their deposit. Over time the loan pays for itself via the yield generated

Ethereum has one called Alchemix with $750 million (and quickly growing) of TVL.

Here’s how this works.

How Borrowing Works

Borrowing on Solana involves depositing one asset into a lending protocol like Solend or Jet and borrowing a lesser amount of any other asset according to a collateralization ratio.

For example with a collateral ratio of 80%, if you deposit $100 worth of USDC, you’re allowed to borrow up to $80 worth of Solana. If ever the price of Solana drops below 10:8 ratio, you’re immediately liquidated causing you to lose your collateral.

For this reason, borrowers follow a set of unwritten rules:
(1) borrow a small fraction of your deposit
(2) don’t borrowing volatile asset pairs
(3) monitor your position 24/7, ideally with an external bot/protocol

And even then borrowers can still lose their deposits to systemic risks like flash crashes and network outages.

Systemic Risks

During a Flash Crash, prices of an asset dip sharply and suddenly and rise again, sometimes in a matter of seconds, forcing liquidations before a human or even bot can respond. This happened September 2021.

Borrowers are also exposed to forced liquidations during network outages like what happened in January 2022.

Solend won a lot of faith during this event by paying out ~$500,00 to retail users that were liquidated. However as their TVL grows over a billion dollars, there’s no guarantee they cover the next systemic event.

For this reason, we believe it is much better to interact with Solend via a layer that manages your positions and protects you from liquidation.

If you’re a retail user we believe you’re better off using our protocol.

Our Solution

We propose a borrower friendly lending platform with two major innovations:

(1) No Liquidation Risk
(2) Deposit Earns Collateral

This works by only letting the borrower the same asset they deposited, so the borrow ratio never changes. (They can then swap that asset for any other token they want).

Then we yield farm the collateral using a safe yield protocol like Anchor and use the interest to repay the borrow so that over time the collateral requirement shrinks.

This means over time the loan repays itself and you can withdraw your deposit at no cost. (You also keep the right to withdraw at any time)

Here’s a simplified example of how this is implemented.

For example, the borrower deposits 100 USDC into the lending protocol, and receives 80 USDC of borrow. The deposit is farmed out on Anchor, generating 20 USDC a year, which is used to reduce the borrowers collateral ratio. So after a year, your $80 collateral requirement shrinks to $60, and in four years, you get your $100 deposit back at no fee.

Leveraged yield farming is a safer way to generate high yield

We can repeat this cycle multiple times to multiply yield generated by the protocol up to 4.5x.

We expect to be able to generate 90% APY using Anchor as the yield source at little risk to the consumer.

Does this sound too good to be true?

This is actually the way banks operate, you deposit money into a bank, use a fraction of that money for day to day use. Meanwhile the bank loans out your money to others, generates yield on that and gives a cut of that yield back to you.

You get much higher yield because DeFi offers much higher yield sources to retail investors than in TradFi

Risks

Of course, no DeFi protocol is fully safe, our protocol will incur loss in the case the stablecoin used for yield generation depegs significantly or there’s a programming mistake in the yield protocol or our lending protocol. However these are black swan events, and most of DeFi will have to collapse before USDC or UST depeg.

By DeFi standards our protocol and leveraged yield farming generally is a safe way to generate high yield.

Proven Model

One important technical detail is that the user will receive a synthetic asset as borrow instead of the asset itself. The synthetic asset will be redeemable for the original asset plus a collateral factor creating a very strong peg to the base asset.

The closest parallel to our protocol is Alchemix on Ethereum mainnet.

We have seen Alchemix protocol implement this mechanism successfully with $750 million currently in total value locked with no major issues.