The Decentralized Finance (DeFi) market has had a tremendous year in 2021 in terms of Total Value Locked (TVL). According to a report by Market Forces, the DeFi market soared 335% to $85 billion within the third quarter of 2021. However, there is a pitfall with DeFi's shared-pool lending protocols. These protocols are vulnerable to some market-related risks. For example, Venus, the biggest lending protocol on the Binance Smart Chain (BSC), experienced insolvency due to the price manipulation of a collateral asset (XVS). CREAM Finance also suffered from $130 million of bad debt due to a $2 billion flashloan attack. Whenever a shared-pool lending protocol whitelists a token as collateral, the entire protocol is susceptible to the risk posed by that token.
Silo Protocol adopts a new approach to the money market via its isolated lending protocol. Although many protocols implement them, the founding team has come out to say that Silo is offering something different from the rest. While some isolated lending protocols like the Rari's Fuse pool have a single point of failure due to their design, others like Kashi's fragmented markets use extreme isolation to the point that the market is spread too thin and fails to be efficient. The Silo lending protocol combines the efficiency of shared-pool lending and the security of isolated money markets.
Understanding The Silo Protocol & Its Solutions
Silo is a decentralized and non-custodial lending protocol that allows users to borrow any crypto asset with another. An isolated money market supports only two crypto assets, a unique token and the bridge asset (ETH). When they are created, every Silo shares the same collateral factors that can be configured for each Silo. Within the Silo protocol, the bridge asset's job is to connect all Silos. Before a collateral token can be used to borrow another, the borrower is required to create two positions that are both denominated in ETH. The idea is to ensure that both positions cancel out each other. Although the user's exposure to ETH will be minimized, the exposure to both the long and short will be maximized.
Silo protocol provides similar risk isolation Liquidity Provider pools on Automated Market Makers (AMMs) like Uniswap. Just like Uniswap, a Silo can be created for any asset, and users can borrow up to 50% of the value of their collateral. In terms of security, the protocol mitigates risk by design. Every Silo comprises two assets (a bridge asset and a unique token). By isolating the risk of any asset to a particular Silo, there are no systemic risks to assets held in other Silos.
To solve the problem of inefficiency, the Silo protocol implements one Silo only for each token asset. This helps concentrate liquidity in single pools, allowing any token to be used as collateral to borrow other tokens. As a permissionless protocol, Silo Finance is open to everyone and anyone. This means that you can be able to create a market for any token on the Silo protocol.
The Governance Of The Silo Protocol
Silo is launching a fully Decentralized Autonomous Organization (DAO) known as the Silo DAO. The governance token will confer on any holder the right to be part of the decision-makers regarding the protocol's future. This will be done through voting and delegation rights. Although the founding team has laid a strong foundation for the protocol to thrive, it is on the community to ensure Silo becomes a leading protocol for secure money markets.
Silo is seeking to improve the existing implementations of lending markets drastically. By offering secure and efficient money markets to virtually all crypto assets, Silo is on course to become an essential primitive in DeFi. You can also join the Silo whitelist.