New lending protocols: Instadapp launches Fluid & Morpho introduces Morpho Blue, Goldfinch faces $7m default from RWA loan, Frax Finance launches sFRAX,...
Issue #53 of The State of DeFi Lending newsletter
Welcome to issue #53 of The State of DeFi Lending, a newsletter covering the highlights of lending markets in DeFi.
In this issue we cover:
Instadapp launches Fluid Protocol, a novel lending protocol which attempts to solve the problem of fragmented liquidity, presenting a platform for novel DeFi strategies.
Morpho introduces Morpho Blue - a trustless lending protocol that aims to address issues Morpho has encountered whilst building atop of Aave & Compound.
RWA lending protocol Goldfinch faces substantial losses of $7m, after a RWA loan went sour. However, Warbler Labs - a core contributor to Goldfinch - has committed to cover these costs to avoid protocol bad debt.
Frax Finance has rolled out sFRAX in an attempt to replicate DAI’s supply increase after the DAI Savings Rate was re-introduced earlier this year.
Read below for more…
News
Instadapp launches a new lending protocol called Fluid that is positioned as a new DeFi primitive.
Fluid Protocol is the result of 1.5 years of development in DeFi by the Instadapp team. It combines the best features from major DeFi platforms including Uniswap v3, Aave, Compound, MakerDAO, and Curve.
For context, Instadapp has been a significant player in DeFi since its inception in 2018. It has operated as a middleware protocol, simplifying existing protocols and providing innovative strategies like flashloans. Instadapp has a multi-chain infrastructure with a total value locked (TVL) exceeding $2 billion.
At the heart of Fluid is the Liquidity Layer: This serves as a hub, consolidating liquidity from all protocols. It manages automated limits for protocols and ensures efficient liquidity use. Its design tackles the challenge of liquidity fragmentation in DeFi by enabling seamless transitions between protocols without impacting the underlying liquidity.
The Lending Protocol is the most fundamental protocol on Fluid, focusing on lending and earning. It promises simplicity for users and ensures they benefit from the latest advancements without needing to transfer assets.
The Vault Protocol is aimed at borrowers and offers several advantages like higher LTVs, improved rates, and more efficient liquidation mechanisms. Liquidations in the Vault protocol work like swaps on Uniswap v3, allowing for efficient and cost-effective liquidation processes.
Fluid prides itself for including the so-called DEX protocol as a groundbreaking initiative which introduces the concepts of smart debt and smart collateral. These unique features allow users to leverage their debt and collateral as liquidity for trading, transforming conventional DeFi mechanisms.
The INST token represents governance in Fluid. Holders of INST have various responsibilities, including rate setting, protocol configurations, and establishing automated protocol limits.
The official launch of the protocol is expected for January 2024, featuring Lending & Vault Protocol and a foundational liquidity layer. The DEX protocol launch will come a few months later. The full blog post can be found here.
Morpho launches Morpho Blue - a trustless lending primitive that targets improvement in efficiency and flexibility.
In terms of efficiency, Morpho Blue offers improved interest rates, a significant reduction in gas costs (by 70% compared to current platforms), and superior collateralization factors. It supports permissionless market creation and also provides users the freedom for risk-return profiling, contrasting with the existing one-size-fits-all models.
With just 650 lines of Solidity code, Morpho Blue ensures easy comprehension and security. The protocol is immutable and not upgradable, ensuring its consistent operation forever.
Morpho initially launched the Morpho Optimizer. This sat atop platforms like Compound and Aave, augmenting their interest rate efficiencies. However, limitations like trust dependency, inefficiencies in rate spread, and inflexibility in asset listings capped its potential growth.
Key Features of Morpho Blue are:
Isolated Lending Markets: Lenders can lend at higher liquidation LTV (LLTV) while maintaining the same market risk as with multi-asset pools with lower LLTV.
Improved Interest Rates: The protocol doesn't lend out collateral assets to borrowers, ensuring higher capital utilization and sidestepping fees for platform upkeep.
Developer-Friendly Tools: Morpho Blue is built with modern smart contract patterns, facilitating advanced actions for liquidators and ensuring gasless interactions.
Permissionless Risk Management: Morpho Blue can be used as a base for adding more logic layers, enhancing core functionalities, or even simplifying the user experience.
Morpho Blue's code is made available under the Business Source License 1.1, governed by the nonprofit Morpho Association and overseen by Morpho Governance, represented by MORPHO token holders. Importantly, this license will transition to GPL after two years or if the protocol fee switch is triggered.
The full article and whitepaper are available here.
RWA lending protocol Goldfinch faces substantial losses of $7m, after a $20m loan granted by the platform went into default. However, Warbler Labs has committed to cover the loss in order to avoid bad debt.
Goldfinch granted a loan to the tune of $20m to a borrower called Stratos which made poorly performing investments in a real-estate tech company and digital assets.
$7 million of the total funds are now at risk of being lost. Warbler Labs, a contributor to the Goldfinch protocol and one of the backers of the loan, disclosed the issue and stated that they will cover all the losses to investors.
It's the second instance of loan issues on Goldfinch this year which has raised concerns over the due diligence processes and the difficulty of underwriting RWA loans on DeFi rails.
Frax has launched v3, its biggest upgrade since its inception in December 2020 . Users are able to stake FRAX for sFRAX and earn a return targeting the Federal Reserve’s benchmark rate.
As discussed in a previous edition of this newsletter, Frax has finally launched its v3 which includes RWAs (mostly USTs) in the collateral composition. Frax will utilize collateral backing FRAX to purchase treasuries through its offchain entity, FinresPBC.
The addition of sFRAX to the product suite should drive demand for FRAX, whose supply has fallen from a peak of $2.9B in March 2022 to $670M in early October. So far, there has been no noticeable increase in the supply of FRAX, however.
~$40m sFRAX has been minted yielding approx. 6.8% APY.
The addition of Fraxbonds (FXBs) will allow market participants to purchase FRAX at a discount and redeem their funds at maturity, with implied yields supposed to compete with offchain yields.
Integrations of FXBs and sFRAX within Curve’s and Frax’s lending markets will open the door for market participants to effectively access high rates with leverage.
Short news & announcements
Blockworks Research publishes update on MakerDAO’s smart burn engine
Messari published an interesting graphic that highlights how the RWA shift has increased lending APYs
Contango launches cPerps - a product that is based on recursive lending
USDR, a stablecoin backed by DAI and real estate, depegged by 50% as the DAI reserve was drained by users who swapped USDR into DAI.
Non-custodial crypto lender Cicada Secures $9.7m in Pre-Seed Capital Commitments
Solana-based DEX Kamino introduces Kamino Lend, an upcoming lending product that will increase capital efficiency with a unified liquidity market and the Elevation Mode (eMode)