Market’s Superfluid Collateral Furthers DeFi Landscape
There’s a new kid on the block. Market has launched with the mission of making lending markets the preferred strategy for DeFi 2.0. This will be done through the power of auto-compounding liquidity provider tokens. The core idea behind DeFi 2.0 is to build additional functionality and applications over the first generation of DeFi protocols such as Compound, Uniswap, and Aave. Market improves upon existing protocols by improving upon Compound’s initial idea of lending markets.
Within a week, Market has captured >60M USD in liquidity across its five markets. This is because Market lets you harness isolated markets through Fuse, enabling us to realise the philosophy of free markets as the most powerful driving force in asset pricing.
This philosophy means that we will let communities define the value of our assets. The playing field is greatly levelled as the only forces driving value will be the interplay between demand and supply. In order to achieve such a philosophy, transaction frictions must be removed. The ability to onboard a variety of assets coupled with efficient interest curves run in a trustless manner creates these unique conditions for asset price discovery.
The Power of Isolated Markets
The core innovation allowing the onboarding of more types of collateral is the ability to isolate interest rates for each asset. By creating isolated interest rate markets, this ensures that even if a market creator used riskier parameters, it would not impact other markets. Furthermore, if a market becomes undercollateralized, it will not affect other markets too. This significantly reduces the systemic risk faced by the protocol even though it may interact with many different assets.
This is unique as other platforms such as Compound and Aave must limit the collateral they accept to a select group of assets as risk is shared collectively on their platforms. By isolating the risk to each type of asset, this creates the initial conditions for superfluid collateral and more types of assets can now be used.
Increased Composability with more DeFi protocols
2021 is the year of DAOs. The explosion of new DAOs introduced many new types of tokens. These tokens have utility in the form of governance for DAOs and as a form of payment to DAO contributors. A challenge that contributors face is deciding to liquidate or hold their DAO tokens. This is problematic as most tokens only have a few liquidity markets which could result in price impact.
One of the most important properties of DeFi that led to its explosive growth is its composability. In theory, these tokens should be able to interact with other DeFi protocols. However, their risk profile is currently unknown as many DAOs are less than a year old. With isolated markets, we can keep our peace of mind and still choose to onboard these assets into our lending and borrowing markets. Potential issues with these assets will not jeopardise the entire protocol while further unlocking utility.
Market is built on Fuse, Rari Capital’s flagship product. Fuse lets anyone instantly create their own lending and borrowing pool which is a form of a market. These types of markets were first introduced by Compound finance where users could supply assets to be borrowed or lend assets from the market. Similarly, users can deposit assets into Fuse pools and use them as collateral to borrow with interest rates determined algorithmically based on the utilisation of the pool.
The key differentiator for Fuse is that it isolates the individual pools from each other. This helps to create individual risk profiles for the assets in each pool and thus users do not have to inherit the risk of all collateral on the platform. These isolated markets thus enable new forms of liquidity, making your collateral superfluid.
Enter the Market
The team building Market has broken down the core elements that make up a successful market and built a product that caters to each element. At its simplest, a market consists 3 things:
People that participate in the market
Resources being exchanged in the market
Legitimacy of the market as safe space to facilitate exchange
Market aims to:
make it easy for people to participate by launching on Polygon with low gas fees;
improve the diversity of resources by providing an abundance of types of collateral that can be exchanged, and
make it safe by segregating the risk of each collateral
Superfluid Collateral, A New World
Market has set up 5 different markets each with its own basket of collateral. To begin, you can take a look at each of the individual markets. Let’s look at the Green Leverage Locker markets which currently has >71M USD supplied.
Green Leverage Locker
There are several different types of collateral onboarded into this market. You can choose to onboard specific types of collateral individually, much like Compound. Here’s where things get interesting.
Why would someone use such a product? The idea in such lending markets is so that you can keep your collateral and use that to create liquidity for other activities.
If you’re a holder of any of these assets, you’d be able to utilise them to borrow other stablecoins such as USDC which might have greater utility elsewhere as they are better integrated into other existing protocols.
This concept makes your previous illiquid collateral superfluid.
Isolated Markets in Practice
When you dive into individual assets from the market, you’ll notice that there’s completely different parameters for each of them. This is how isolated markets work in practice. By adjusting the collateral factor and the market’s rates, the risk of each collateral is kept separate from others.
True to its word, market makes it easy for people to participate. It literally takes just 4 steps.
Decide. First, select the collateral you’d like to provide to the market. In this case I chose USDC.
2. Commit. Click on Confirm to add your asset.
3. Transact. Interact with your wallet to confirm the transaction, deciding on the gas price you’d like to pay. As it is on Polygon, your gas cost will be extremely low.
4. Verify. Check that the transaction has successfully completed. You will see your Supply Balance and the asset provided.
Market puts your assets to good use. Rather than simply being idle, you can now use them as collateral for borrowing or lend them out and earn a yield.
Stay tuned as Market onboards even more collateral, building on this simple concept of segregating risk profiles and empowering many more assets to take part in lending markets. It will not be long before your collateral becomes superfluid too!
Qing Ze is a Product Manager at Tribe and actively contributes to Bankless and GitcoinDAO.
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