Silo: Risk-Isolating Lending Protocol Bringing Money Markets to Crypto Assets

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The explosion of the DeFi landscape has led to the emergence of thousands of token assets and a plethora of lending protocols that aim to make markets for them. One of such protocols is Silo. Winner of ETHGlobal’s Hackathon 2021, Silo is a non-custodial lending protocol that can provide secure, efficient, and inclusive money markets for tokens. Thanks to its permissionless, risk-isolating protocol, Silo can bring money markets to all token assets.

Existing lending protocols are easily exploited due to their models. In 2021 alone, more than 20 hacks were reported. CREAM finance accrued debt due to a flash loan attack that catered away with $19 million. The platform was also a victim of another attack two months later, leading to the loss of $130 million.

In mid-August, Poly Network, another DeFi protocol, lost a whopping sum of $610 million worth of cryptos to hackers, although the hackers returned the stolen assets. The recent exploit of Venus, another money market, shows that these protocols aren't hack-proof and could be breached anytime.

One factor that's responsible for these frequent hacks is the protocol’s design. Most lending platforms are shared, which has been labeled as vulnerable to market risks. When a shared-pool lending protocol whitelists a token, the risks of getting exposed are high because.

Over time, the asset becomes weak, as they expand lending support to other assets. As a result, these pools become less creditworthy. This presents an opportunity for hackers to act. Many DeFi protocols are also restrictive when it comes to accepting token assets in their protocols.

Silo aims to mitigate these challenges by creating a silo (a pool) for token assets. This means that one pool will be created for every token, with Ethereum serving as the bridge asset, instead of having a single pool for all tokens. For instance, a user will have to move ETH between the silo pools if they intend to use token A as a collateral to borrow token B. The only counterparty risk in Pool B is ETH and not token A, so the risks are isolated. This design creates risk-isolating lending markets for every token.

Silo Collateral and Interest Model

Silo’s collateral model is conservative, given anyone can create a market for any token asset. When a market is created, the default collateral, such as Loan to Value, Liquidation Threshold, and Penalty are set conservatively but can be adjusted on a market level. Users can borrow up to 50% of the value of their collateral, and this will be liquidated when the debt position is 62.5%.

Interests are dynamic and set based on target utilization for collateral. Silo can increase or decrease the rate of an asset until 80% of the collateral is utilized. This maximizes liquidity.

Silo Token and Protocol Governance

As Silo’s launch date draws near (launching in Q1, 2022), the platform decided to take a step further by launching its Genesis token auction on Gnosis. Silo will be using its Decentralized Autonomous Organization to run the liquidity pool. The money raised from the auction would be used to decentralize the DAO, giving the community of users more power.

By power, it implies that the DAO would be in charge of the protocol, make important decisions, as it affects the protocol. DAOs have often been regarded as a democratized blockchain model due to its power-sharing capabilities, transparency, and fairness. The protocol announced that it would launch its token auction from December 6 at 3:00 PM UTC to December 9, 2021, 3:00 PM UTC.

The token will be used to participate in the governance protocol. Holders will be able to oversee assets, adjust lending rates, vote on key aspects of the platform, such as turning on/off revenue mechanisms, adjusting LTV and Liquidation Threshold, etc.

A percentage of Silo’s launch token supply will be given to the community and 85% will be locked in the DAO’s treasury. The community will control this through protocol-owned liquidity. The remaining 15% will be used to handle operational expenses, such as infrastructure services, security services, etc.

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