DeFi has witnessed the greatest innovations these past couple of months. We have seen new protocols and applications emerge sporadically, as well as the creation of improved versions of existing ones. We are closer to the future that we envisioned – a fully decentralized financial system that cuts across all aspects; money markets, insurance, trading, lending, and investments.
Crypto lending protocols are platforms that offer cryptocurrency loans in a trustless manner. It allows the holders to stake their coins in the DeFi lending platforms for lending purposes. On the DeFi platform, a borrower can access a loan, allowing the lender to earn interest once the loan is returned. This process is carried out from the start till the finish without intermediaries.
There are several existing DeFi lending protocols. They vary in the types of tokens they accept, their methods, and security mechanisms. Maker, for instance, allows its users to borrow money via DAI tokens. Aave is a non-custodial liquidity platform for earning interests on deposit and borrowing assets. It allows the lenders to deposit their cryptocurrencies in a pool and receive an equivalent amount of aTokens, its native token. On the other hand, Compound is an algorithmic and autonomous money market protocol designed to unlock numerous open financial applications. By using smart contracts, Compound automates the management and storage of capital on the protocol.
Silo is a non-custodial lending protocol that was created as a result of shortcomings of existing lending protocols. Most of these protocols are highly restrictive when it comes to accepting token assets. They usually have their security structure based on gatekeepers guarding a whitelist. This poor structure has led to countless bad debts and loss of assets.
Overview of the Silo Protocol
Silo is a permissionless-based lending protocol designed to offer secure and efficient money markets for all token assets through a permissionless, risk-isolating lending protocol. When created, every Silo shares the same collateral factors that can be configured for each Silo. They all have a bridge asset like ETH and a unique token. On September 15, 2021, Silo entered the ETHGlobal’s 2021 Hackathon which it eventually won. The protocol functions on three major parameters that include security, efficiency, and inclusiveness. You can read the LITEPAPER for more details about the Silo Finance project.
Silo VS other Tokens that Implement Isolated Money Markets
In order to understand the purpose or reason for the creation of the Silo protocol, we compare it to other existing protocols that implement isolated money markets. Among the several protocols, we examine the two extremes:
- Kashi creates an isolated money market for any pair of tokens imaginable. Dai alone has over 30 markets such as DAI-ETH, DAI-WBTC, DAI-COM, etc. This market design achieves high security at the expense of efficiency; liquidity is fragmented, and markets are spread too thin. Silo Protocol, on the other hand, isolates the risk of any asset to a specific silo, allowing new and higher-risk assets to be immediately utilized in lending markets without causing systemic risk to other assets held.
- Rari’s Fuse creates isolated pools, each functioning like Aave or Compound. Because a pool can consist of many tokens, the entire pool is rendered risky when one of the token assets cannot be trusted for any reason. In other words, we are back to the same problem we see with CREAM/Aave/Compound, where users share the risk of all tokens in the pool. However, the Silo protocol mechanism has circumvented this issue by compartmentalizing every asset in different Silos. Each of these Silos contains a unique token and a bridge asset.
The Silo protocol has indeed come at the right time in the DeFi’ forward’ trajectory. With its innovative approach, it is better positioned to solve the frustrations borrowers and lenders face on most existing protocols.