Solend cTokens and Isolated pools • When security meets Infinite abilities
Solend the Hyper-growth
Solend after becoming the winner of the DeFi track in the Solana seasons hackathon in Jun ’21 has come a long way in becoming the leading lending and borrowing platform on Solana with ~$935M+ in TVL. And as they say “Solend is the autonomous interest rate machine for lending on Solana”.
Solend is a lending platform built on top of the Solana blockchain where interest rates are generated algorithmically. You can Earn Interest (by lending), Borrow, Leverage Long & Short on Solend and there are some other things like cTokens and Isolated Pools that’s been launched recently and we are going to dive deep into that exploring the world of opportunities by simplifying them.
This essay focuses mainly on cTokens and Isolated pools, so I briefly discussed the other features along with the basics so that a beginner can also get it along the way. If you want to know more about those, Refer to the mentioned sources in the last section.
First, We will discuss a bit about lending fundamentals in short, a quick look into solend (if you are new here) and then we will go straight into Understanding cTokens and Isolated pools with their RISKS, use cases, and how can you get the most out of it.
As there are not many resources to understand these two and how you can get started, this essay can make you get the hang of it in the easiest way.
Ready? Here you go🔥🚀
Lending and borrowing 101 in DeFi
Taking out a crypto loan is easy compared to traditional loans🏛. You will get a loan amount depending on how much collateral you can use. The loan-to-value ratio refers to the amount of the loan and then the collateral’s value. That being said, if you put up, for instance, $100 in crypto as collateral and the loan you receive is $50, the LTV ratio is 50%. Think of it as using a savings account. With a savings account, you stash the money while the credit union or bank pays certain interest on the balance. This way, it can use the money to issue loans to other people in return. Crypto loans usually come with very low LTV ratios due to the volatility of the crypto markets. Currently* the lending market cap in crypto is at ~$7.9* billion. I know it sounds crazy, and it's True :)
source:(as of 25 Feb)https://www.coingecko.com/en/categories/lending-borrowing
These are the basic fundamentals on which lending and borrowing in crypto operate. Now let’s take a quick look at Solend and then Dive-deep into the Exciting cTokens and Isolated pools on Solend.
LFGGG📈🚀
A quick look at Solend
Now quickly let’s explore what you can do on Solend
Lending:
You can deposit or “supply” any supported asset (as of now 22) on Solend. And you will earn interest on the basis of the calculated Supply APY (annual percentage yield — similar to annual percentage rates in traditional lending) and additional Supply Rewards in the form of SLND tokens (the native token of Solend).
For example, you choose to supply the SOL. Seeing the current market rate you will get an interest of 1.30%. That 1.30% APY you will get on the original asset supplied here is SOL. And with some other tokens depending upon markets you also get SLND rewards in addition to your Supply APY. Getting this SLND as a reward is called Liquidity mining. Which is basically improving the liquidity of the SLND token and incentivizes users to participate in the Solend platform.
Borrowing:
You can borrow out of the supported tokens by supplying your asset as collateral and how much you can borrow depends upon the Loan-to-value ratio (LTV) of the specific token you are borrowing. The LTV is be fixed and mentioned by the platform for each asset. For example, the SOL token has an LTV of 75%. Simply we can say that for 1 SOL supplied, you can borrow a maximum of 0.75 SOL worth of any token listed.
Going long with leverage:
If you are bullish📈📈 and hopeful about an asset, you can borrow funds to buy more of that particular asset, thus increasing your potential returns. This is also called leveraging. In crypto, the same can be achieved by borrowing.
For example, you have $100 SOL and you think that prices are going to go up. So you can deposit your SOL in Solend as collateral and borrow say $50 USDC. This $50 USDC can now be traded for another $50 worth of SOL. In this manner, you have increased your exposure to SOL to $150. This is equivalent to a 1.5x leverage compared to the initial capital of $100. You can do that multiple times to get more leverage but it will increase the risk of you getting liquidated if something goes wrong.
Shorting by Borrowing:
Like traditional finance, you short sell an asset when you think that the price is going to go down. In crypto, you can essentially short an asset by borrowing.
Let's say If you are bearish 📉📉on SOL and feel the prices will go down. You can now deposit stable coins such as USDC and borrow SOL on Solend. If the SOL price drops, you can buy it back at the cheaper price from the market and repay your debt, essentially profiting from the drop in prices.
With that said, let’s come to the Spotlight of this essay, cTokens and Isolated Pools. 👇👇
cTokens
cTokens are a yield-bearing deposit receipt.
If we decode that, It means by converting your asset you can get a tradable token that’s also earning through Solend. It will be earning interest wherever they go. Because you have a flat number of cTokens but amount underlying can be redeemed and also increases over time according to the Interest rate. cTokens have always been supported by the Solend smart contract, and to make the UI simple currently, they are not included on the main solend.fi page. So they exist separately, meaning they don’t count as collateral towards your account and you can’t borrow against cTokens. You can mint cTokens on solend.fi/ctokens .
Fun fact🤫: Here “C” in cTokens denotes collateral. You put your collateral to get the cTokens.
The start of infinities
cTokens provides enormous opportunities for developer integration. If you are using cTokens for lending and borrowing, your cTokens will be are held by Solend’s smart contracts, which are to be used as “collateral” for borrowing against it. So this tool is largely for developers to integrate our cTokens into their protocols, and then direct their users here to mint their cTokens.
They are just like regular SPL tokens (A Fungible Token program on the Solana blockchain. which provides an interface and implementation that third parties can utilize to create and use their tokens.). Like any other SPL token, they are easily composable and compatible with just almost everything.
If you’re building something using Solend cTokens, you can check out their Typescript SDK and REST API at http://dev.solend.fi and Solend’s Grants program! This Solend’s developer portal provides the tools and a platform on Solana to buidl DeFi apps on top of it. Do check out!!
Also note that cTokens currently do not have liquidity mining, such as additional SLND or MNDE rewards.
Solend x Saber
Now recently Sabar launched their cToken pools with Solend. The first one is the cUSDC/cUSDT, and cSOL/cmSOL is the other. Saber allows its users, to transfer assets between Solana and other blockchains, earn passive yield from transaction fees, token-based incentives and automates DeFi strategies. You can swap your USDC/USDT into cTokens on solend.fi/ctokens, and start getting Saber LP yield by depositing into Saber.
So far cTokens has been one of the many features of Solend which is not only making Solend the best yield-bearing machine on Solana but also opening up a world of possibilities for developer integrations. It also saw good usage by the users, You can see the cToken successful mints from the image below.
How Mint/Redeem cTokens guide
Step 0: Visit solend.fi.ctokens, after connecting your SOL wallet you can either Mint or Redeem cTokens, which you can choose from the available tokens.
Step 1: For minting cTokens- Here it’s an example shown with SOL->cSOL. Also, you can choose from different tokens and you’ll get respective APYs for those cTokens whether it is cUSDC or cSLND or cUST, etc. Approve and Voila!! You have got cSOL in your wallet 🎉. Now it will earn interest wherever it goes.
Do note that you might require a little bit more than the entered amount to mint cTokens right now.
Step 2(For Redeeming): To Redeem cSOL to SOL. Enter the amount of cSOL and enter Redeem, approve the transaction from your wallet, and you have got the SOL in your wallet.🎉
Now let’s take a look at Isolated pools and how they make the protocol less risky and more secure.
Do they🤔? let's find out...
Isolated pools
As Solend protocol says on their blog “You can think Isolated pool as a quarantine for risky assets.”
(lol!😂 you might be thinking, What a tragic way to describe a product! :laughing_with_tears. Well it’s kinda opposite of what you might think, let's find out)
So Isolated pools enable a lot of other tokens which might be risky to get listed in Solend’s main pool to get listed on other pools. “Isolated pools are separate lending markets with assets that can be used as collateral for loans against each other”, as opposed to having a single cross-collateral pool in which any one asset can be borrowed against the other. Like Uniswap did for tokens in DeFi Summer, Solend isolated pools unlock utility for the long tail of assets. In a protocol with just a single cross-collateral pool, listing new assets is to be done carefully as it has chances of putting the entire TVL (Total Value Locked) of the protocol at risk each time.
If you are still wondering about its occurrence in the past, to let you know, Cream Finance has been hacked multiple times for $19M and a whopping $130M 🌋🤯due to listing assets with non-standard implementations. Now you know how crazy it is to list new tokens which might be risky and volatile in nature.
Now let’s take two example scenarios, and see how it affects the protocol,
Scene A: Let’s take an imaginary token X listed on Solend, whose minting is controlled by a DAO. The minted X tokens are used to deposit in solend and use as collateral to borrow all other assets on solend. If the governance of token X is unsettled in the DAO, one can mint an Infinite number of token X. If token X is dumped that means the value of collateral deposited in Solend becomes 0. In this case, the minimum risk for the value is — deposit limit * X LTV, and the available liquidity.
Scene B: Once again Let’s take an imaginary token X listed on Solend, which has low liquidity(Few opportunities to buy and sell). That means its price can easily be manipulated. Now the price of token X is manipulated and misreported as extremely large. Once again X tokens are used to deposit in solend and use as collateral to borrow all the available liquidity. Here the deposit limit and LTV don’t help because the individual tokens are now worth an infinite amount, So it puts all the available liquidity at risk. And Those funds are as good as gone now.
Wait! Wait! Wait! don’t freak out, there is more to the story.
How Solend does it
Solend has a Global main pool where the majority of the TVL gets there, and now with the launch of these Isolated pools, the additions are some other small isolated pools. The Global main pool is what you see on the main page of solend. In Solend every asset goes through due diligence before listing and is only listed if it meets Solend’s risk framework’s criteria. That’s why many assets that could be haven’t been listed on Solend yet. To get listed on the main page of Solend, there are certain parameters, which include things like having Reasonable liquidity, Loan to value ratio, Optimal utilization rate, Deposit and Borrow limit, and many other parameters. These parameters help to maintain the protocol’s health, avoid listing risky and illiquid assets, and all together minimize security risks and make Solend a trustable DeFi protocol for Users. Along with this SPL tokens on Solana are forced to conform to the SPL standard with no custom behavior possible, unlike ERC20 which allegedly follows a loose standard with many countless tokens not properly conforming to the standard. This standardization helps developers and auditors and establishes a certain threshold for new tokens to get listed. With that said, Isolated pools are not a Silver bullet! The attacks described above are still possible.
An Ethereum-based isolated lending protocol Rari Fuse with $1B in deposits has proven this Idea of an Isolated pool very well. It has seen great success with assets like OHM and FEI, which have very strong communities but aren’t listed anywhere else.
Isolated pools are smaller pools where relatively more risky tokens get listed. Tokens like xSTEP, Locked Staked IN (lsIN) are some examples of those tokens. Being illiquid and very volatile makes them risky for getting listed on the Solend main pool and de-risks the TVL there, so now even if something goes wrong it is limited to the isolated pool and only affects the smaller TVLs present in the Isolated Pool. This limitation is the key in this method, Users can continue using the cross-collateral pool normally while creating a closed box for experimental assets. This echoes the fact that “Isolated pools are like quarantine for risky assets”
What more, you can do with Isolated pools 🤔
Along with more assets getting listed, Isolated pools also enable more aggressive parameters from which some set of users can benefit.
For example, the current loan-to-value(LTV) ratio for SOL and USDC in the cross-collateral pool of Solend is 75%. This means you have to deposit $100 worth of the asset to borrow up to $75 worth of assets. It prevents users from taking too many risks so avoiding the case the under collateralization and also prevents the overall socialized loss for all lenders in the pool.
But in Isolated pools, the LTV could be pushed up to 95%, making it more capital efficient. This means the users who can handle it, can take up to 20x leverage as opposed to only 4x possible with the LTV of 75%.
In simple terms, by taking an example from the STEP isolated pool, a strategy can be done where You deposit XSTEP to borrow STEP, then you take that STEP and make it XSTEP by staking it and deposit that XSTEP back into the Solend pool and Borrow more step. If you keep doing that cycle a few times you can get leverage on your XSTEP position. This is relatively riskier ⚠ and not suitable for the average users as there is a high chance of getting liquidated if something goes wrong but the sophisticated users who sign up for a higher risk and higher reward can certainly benefit from this.
Currently, apart from Main Pool, the other Isolated pools are the TURBO SOL pool, Step Pool, Invictus Pool, and Bonfida Pool, and Solend says, yet there are many more Isolated pools to come. Now let’s briefly see what the above pools are, the parameters, and what they represent.
TURBO SOL Pool: Currently it has ~$1.25M TVL with 90% LTV(Loan-To-Value) and 2 assets(SOL, USDC). The TURBO SOL pool offers increased LTV to allow a leveraged SOL position up to 10x. Higher leverage comes at the cost of increased liquidation risk so proceed with caution.
STEP Pool: Currently it has 4 assets of ~$1.9M in TVL with 50% LTV for STEP and xSTEP and 75% for SOL and USDC. Step Finance is a transaction aggregation and portfolio management platform that enables users to transact and monitor the entire Solana ecosystem in one easy-to-use location. The Step pool allows STEP and xSTEP tokens to be deposited and borrowed.
Invictious Pool: Currently it has 3 assets of ~$8.47M in TVL with 40% LTV for lsIN and 75% for USDC and UST. The Invictus pool contains the Locked Staked IN (lsIN) token which allows you to earn lsIN’s staking yields while using it as collateral.
Bonfida Pool: The Bonfida pool has 3 reserves: FIDA, SOL, and USDC and currently it has ~1.92M in TVL. The other parameters are on the image below
Bonfida is a full product suite that connects the gap between Serum, Solana, and the user.FIDA is a governing token of Bonfida on Solana, Bonfida strives to buidl a user interface, API, and data analytics for the Serum decentralized exchange. And Yes, you got that right, this is where you get the Solana .sol domain.
Tl;dr: The main pool is kinda risky for listing new assets but Isolated pools decrease the risk by making a new pool altogether and listing risky or illiquid tokens there.
Isolated pool Guide
Visit solend.fi/dashboard where you can see the other Isolated pool beside the Main Pool tab and connect your SOL wallet.
For this guide, let's choose the Step Pool and demonstrate how you can use an Isolated pool. The steps remain the same for all other pools.
In this Step Pool Dashboard, you can see the parameters like LTVs of the assets, total supply, APY while borrowing, and others.
Let’s say you have SOL which you want to deposit(supply) in this Step Isolated Pool. You click on SOL, enter the amount you want to supply, click on *Supply*, and approve the transaction in your wallet.
Done!! now you have supplied some SOL and now you can see you have got a borrowing limit, up to which you can borrow in this pool.
To Borrow: Enter the amount of STEP(in this case) which should be under your borrow limit and click on *Borrow*. And now you will get that much STEP in your wallet
You can Repay this loan by providing the borrowed asset with that borrow % APY. And then If you want to Withdraw the asset you supplied you can do so in Withdraw tab and get your assets back with the supply APY mentioned on the dashboard.
This is the in and out of the Isolated pool’s functionalities. Now what are you waiting for
Now this example will demonstrate the example you read in the “What more you can do with Isolated pools” section to give you more nuances to explore,
Example Steps with STEP (Well, now it’s becoming meta **crowd goes mad**)
- You deposit xSTEP to Borrow STEP with that.
2. You borrow that STEP, take that STEP to step.fi, and stake those STEP to get xSTEP(i.e. Staked STEP).
3. And then use that xSTEP to supply in the Step Isolated Pool and borrow STEP with that. Then you repeat this process again and again to get more leverage.
I know there is too much going on with the above example😂, but it’s for the sophisticated users who want to take higher risks to get higher returns while being at the risk of getting liquidated if something goes wrong.
Yes, that was all about cTokens and Isolated pools with detailed examples and Guides. The followings are some important things about Solend protocol.
Community and Backers
Solend is backed by the most prominent investors and VCs of the ecosystem. This includes the likes of Solana foundation(from the hackathon which Solend got started), Coinbase ventures, Polyhain capital, Alameda research, and angels like Balaji Srinivasan, Antonio Juliano, and many more. This generates trust in the project and shows the Solend protocol’s strong backing.
Not only the Investors but also the community makes up for what Solend has built till now. Solend has grown its popularity amongst people and gathered over ~44k+ followers on Twitter. Its discord community is also growing rapidly with over ~11k+ members on its discord server. In their Discord the Community is super excited about Solend, they take part in giving feedback helping other folks, and also Solend team is always there to solve queries of people around Developer things and the protocol in general.
Future Roadmap
Solend is indeed the autonomous interest rate machine for lending on Solana. Solend has been implementing new features in the protocol to make lending exciting and rewarding as well. This month in February after launching one of their most awaited cTokens and Isolated pool solend is on the way to list more tokens in the protocol and collaborate with projects of similar interest like Saber and many more to enable Solend’s features to more users. Solend is also working for a Liquidity Minting 2.0 program, Setting up a governance forum, and Exploring the NFT lending. And we might get to see them implemented in near future.
If you can see their January in review to get a glance at some more things, where they also post updates and roadmaps.
Conclusion: Solend, the Interest rate machine🚀🚀
Solana is the best solution for solving the scaling problems users face on the Ethereum blockchain and maintaining its transaction speed. However, there was no lending ecosystem for quite some time on the Solana network, which is one of DeFi’s most impressive capabilities. With Solend coming on Solana, enabled everyone to earn interest or take a loan against their assets on Solana. This is done at a very affordable price and extremely high speeds, which will motivate interested investors to choose the network. Features like cTokens and Isolated pools open up many possibilities to work with while providing the best lending solution in the market. and Assuming Solend takes full advantage of these investor-friendly qualities, the loving community, and useful opportunities, the project has tremendous room for growth in the space.
That was the deep-dive into cTokens and Isolated pools of solend protocol.
If you have any queries or feedback, reach out to me @inSitesh on Twitter :)
Until then …
References
- Solend docs
- Solend blog
- Isolated pools(solend blog)
- https://www.stilt.com/blog/2021/08/what-is-crypto-lending/
- https://superteam.substack.com/p/deep-dive-solend (This deep-dive does a good job of showing fundamentals and simplifying the other features of Solend)
Some of the Images and numbers are taken from Solend’s official sources. If you want to know more you can also read their docs. The information contained herein is for informational and entertainment purposes only. Nothing herein shall be construed to be financial, legal, or tax advice. Trading cryptocurrencies poses considerable risk of loss and readers are advised to do their own research before making any decisions. Read the full Disclaimer.
