Sturdy V1 was a trendsetter for leveraged yield farming, reaching over $30m TVL and becoming the largest mainnet lending protocol with no token.
While leveraged yield farming is a powerful use case, it’s become increasingly saturated and, as a result, challenging to attract lenders. At the same time, we’ve observed many of the drawbacks existing lending protocols face and have a robust understanding of their shortcomings. Consequently, we propose that Sturdy V2 take on more than just leveraged yield farming by developing a new primitive for lending.
The DeFi lending landscape
In many ways, the purpose of DeFi is to empower users to manage funds with greater control and autonomy than TradFi. At the heart of this pursuit is sovereign risk management: as a user, it should be entirely up to you how much risk you tolerate and what you’re willing to lend against.
Today, this is not the case. When a protocol offers vaults with rigidly defined collateral types, they tell you how much risk you can take on.
Take Compound V3, for example. All Compound users lending USDC are earning ~3% APY and are exposed to a common set of collateral assets. Many prospective users would be willing to lend against additional collateral assets if they earned 4% APY, and others would accept 2% if it meant limiting their exposure. Yet neither party has a choice in the matter. It’s a one-size-fits-all design.
Of course, assets can be modified or added, but all that means is that either team members or governance votes decide which collateral types are available for you to lend against. Why are they telling you what you can do with your own money?
A handful of projects have tried to circumvent the rigidity of permissioned pooled lending by isolating risk through separate pools, but this approach comes with its own drawbacks. Lenders must actively manage their position to maximize yield as the pool rates fluctuate. Bootstrapping new pools becomes a chicken-and-egg problem, where borrowers are waiting for lenders, and lenders are waiting for borrowers. As a result, many pools tend to lie empty, with liquidity fragmented.
Users should be able to take risk management into their own hands rather than select from a multitude of isolated pools with fragmented liquidity or rely on the protocol to mitigate risk via selective onboarding. That’s why we’re introducing Sturdy V2, a brand-new primitive for DeFi lending.
Sturdy V2 introduces permissionless pooled lending, accomplished through a novel two-tier architecture. Here’s how it works:
Tier 1: Silos
Each silo will be a mini-lending market consisting of a single lending asset and a single collateral asset. For example, you could have a silo where users can only lend or borrow USDC and can only use ETH as collateral.
Each silo will be isolated, meaning a user who lends to silo X has no exposure to silo Y. They’ll also be simplistic, immutable, permissionless to create, and technically similar to Fraxlend. Silos themselves aren’t a new development and can be found in existing isolated lending protocols. What makes Sturdy V2 innovative is its novel method for preventing liquidity fragmentation. This is where the aggregation layer comes in.
Tier 2: Aggregators
The second layer of Sturdy V2 consists of aggregators that will move funds between these silos.
Users lend a single asset to a Yearn-style lending optimizer, which deposits the assets to whitelisted silos.
For example, imagine that there are five silos for lending USDC that use ETH, BTC, stETH, rETH, and cbETH as collateral, respectively. One could create an aggregator that only lends to the silos with ETH, BTC, and stETH as collateral. The aggregator automatically distributes lent assets among the whitelisted silos to maximize yield. Users lending to the aggregator would be exposed only to the collateral types they’ve chosen, with no exposure to other silos or collateral assets.
This is great for user autonomy and risk management, but the benefits extend much further. As we described earlier, isolated lending enables sovereign risk management but comes with its own set of problems. Sturdy V2’s aggregators solve them. Bootstrapping liquidity for a new silo would be easily accomplished by whitelisting it in an existing aggregator, creating instant, deep liquidity from the moment a silo is deployed. Aggregators also vastly improve the lender experience, enabling them to deposit to an aggregator instead of having to manage many different positions.
Aggregators will be built on top of Yearn V3, with several additions that enable them to be entirely permissionless and autonomous. Existing yield aggregators typically rely on manual allocation via multisigs, as determining the optimal allocation is too computationally expensive to be performed on-chain. Sturdy V2 solves this via zero-knowledge proofs, which enable the optimal allocation of assets to be computed off-chain.
We’ll introduce some more new features to DeFi, like atomic just-in-time liquidity for lending. Expect more info soon.
Preparing for Launch
Sturdy V2 introduces a novel primitive that will enable lenders to take control over their risk management and projects to permissionlessly create lending markets for their tokens without sacrificing on deep liquidity or the user experience.
Our top priority is to ensure that Sturdy V2’s code is bulletproof. To that end, we are in the process of auditing the protocol thoroughly. The release of V2 is scheduled for around October 2023, pending the completion of audits and adoption by governance.
In the meantime, we want to hear from you!
Any thoughts are appreciated.
Here are a few specific points we’d love additional feedback on:
What tokens would you most like to lend?
What tokens would you most like to use as collateral?
In theory, aggregators could expand to supply assets to third-party protocols (e.g. Aave, Compound, Yearn, third-party isolated lending pools) instead of being limited to just Sturdy’s silos. Would you like to see third-party protocols integrated into the aggregator?
Are there any other features you’d like to see as part of V2?