Original title: The Future of Solana DeFi Featuring Kamino Finance
Original author: Thor Hartvigsen, hyphin
Original source: https://www.onchaintimes.com/
Compiled by: Mars Finance, Daisy
introduction
In 2023, Solana experienced a resurgence, developing a large ecosystem of decentralized applications (dApps) with diverse products and use cases. Among these projects, Kamino Finance stands out and has achieved rapid growth this year. With over $2.4 billion in liquidity and $800 million in borrowing, Kamino has become one of the largest dApps on Solana, offering a range of high-yield products involving its unique money market. This growth momentum seems to show no signs of stopping, and with Kamino 2.0 approaching, the road to $10 billion in total locked value (TVL) is paved.
Today’s report will cover Kamino Finance, including its underlying product, recent developments, V2 release, and more.
product
Borrowing
The core of the Kamino Protocol is Kamino Lend, which currently includes four different markets: ‘Main Market’, ‘JLP Market’, ‘Ethena Market’ and ‘Altcoin Market’. In each market, users can provide collateral and borrow within a certain loan-to-value (LTV) threshold. The supply/borrowing of various assets and liquidity can be viewed in the table below.
Assets on Kamino Lend
Last week, Kamino launched “Isolated Mode” related to borrowed assets. Until recently, borrowing and lending in Kamino was only possible in “Cross Mode”, which allows multiple collateral and borrowed assets within the same position. With “Isolated Mode”, users can borrow only one asset with one collateral in each position. This allows setting risk parameters for specific assets and increasing the loan-to-value ratio (LTV) for certain assets. As this feature is still in the testing phase, it is currently only available for some specific assets:
SOL/PYUSD (Main Market)
USDC/USDT (Main Market)
LST/SOL pair (Main Market)
2. Multiplication
Another core product of Kamino is automatic revolving lending positions with up to 5x leverage. Examples of this feature include JitoSOL/SOL, which enables leveraged exposure to the returns of the underlying token by borrowing SOL with collateralized assets such as JitoSOL using flash loans. For JitoSol, the actual returns can be viewed in the table below.
The design of the Doubler product is very unique, especially in terms of liquidation risk. The Kamino team has taken two specific measures to mitigate this risk. First, there is the inherent risk of LST depegging, where an asset like JitoSOL or JupSOL decouples from the underlying SOL price. This can be due to limited exchange liquidity and sudden selling pressure. However, most depegging phenomena are temporary and return to the anchor price through arbitrage in a short period of time. In many lending markets, this short-term depegging can cause the liquidation of leveraged positions (such as JitoSOL/SOL). In Kamino, the price oracle is contract-based and looks at the balance of a single staking pool. Therefore, if LST depegs but the reserves remain at a 1:1 SOL ratio, the Doubler position will not be liquidated.
The second measure is related to interest rate risk. In theory, if the interest rate on a borrowing position rises sharply and remains so for a long time, the position may be liquidated. Usually, borrowers will provide additional assets to the market because they can earn income from this high interest rate, which in turn lowers the interest rate in the short term. To mitigate the impact of this situation, although it is unlikely to occur, Kamino sets a utilization cap of SOL at 87%, which corresponds to an annual interest rate of 6.5% for borrowing SOL.
According to a recent post from the Kamino team, “SOL multiplier positions have never been liquidated on Kamino — regardless of 2x or 5x leverage.”
Another interesting multiplication strategy on Kamino is JLP/PYUSD, but it involves additional risks because the prices of JLP and PYUSD are not perfectly correlated like JitoSOL/SOL. You can read more about what JLP is and the risks to be aware of in a recent report.
3. Long/Short
Similar to Multiplier, users can gain leveraged exposure to a variety of assets through Kamino's underlying money market design. In Long/Short, all assets are paired with borrowed USDC, instead of leveraging JitoSOL/SOL in Multiplier. For example, one can go long SOL/USDC with up to 2.9x leverage, long WBTC/USDC with up to 3.3x leverage, and so on.
4. Liquidity
Liquidity is Kamino's first product, launching in 2022, allowing users to supply assets to various liquidity pools on DEXs including Orca, Raydium, and Meteora. Kamino issues fungible representations of liquidity positions, which can be used as collateral in the Kamino lending market.
Development momentum
As the Solana ecosystem gradually heated up at the end of last year, Kamino quickly grew into one of the largest applications on the chain. Currently, Kamino is the second largest Solana protocol, with platform deposits of approximately $2.4 billion, loans of approximately $850 million, and a total locked value (TVL) of nearly $1.6 billion.
Kamino TVL ($)
The massive growth in TVL has led to a surge in fees. For most of the time, Kamino has been generating around $100,000 to $150,000 in fees per day, or nearly $55 million per year. We will conduct a more in-depth analysis of fees and revenue in future reports.
Kamino Fees ($)
Most of the liquidity is concentrated in the main market. However, the JLP market has seen significant growth recently with the addition of PYUSD, making low-cost recycling of JLP possible as PayPal pays incentives to borrowers of PYUSD.
At a more granular level, SOL LST and SOL itself account for the majority of Kamino’s liquidity, with over $1.3 billion in liquidity spread across markets. In addition, memecoins are becoming increasingly popular as collateral for USDC and PYUSD, with the largest token by total locked value (TVL) being WIF, providing $141 million in liquidity.
Kamino V2
With the initial release of Kamino Lend, shaping lending on Solana is not the entire ambition of the project, they have recently released a lot of material about upcoming successful iterations of the original implementation. This upgrade expands on rigorously tested code, further enhances existing functionality, and introduces novel primitives, protocol-level mechanisms, and products designed to significantly improve the user experience of the platform and satisfy a wider range of audience.
While most modern lending applications offer a range of markets, they lack the inherent functionality to create and interact with custom markets. This effectively ignores assets that emerge in highly narrative-driven environments, preventing many willing participants from seeking their services. This is where the first novel primitive, the Market Layer, comes in, addressing the need for permissionless deployment of fully customizable markets, capable of supporting any asset or combination of assets, with configurable parameters.
Creation and management of these marketplaces will be provided through the open source, permissionless Kamino Manager SDK.
This could pave the way for speculators to express their investment freedom by participating in markets that align with their personal asset preferences and risk profiles, all through a single interface.
As the scope of the market inevitably expands, manually optimizing returns across all available verticals will become increasingly time-consuming and complex. In order to achieve efficient yield capture with minimal user intervention, a series of single-asset pools with unique characteristics will be integrated, forming the second novel primitive - the Vault Layer. At this layer, depositors can explore a wide range of options, from conservative risk-adjusted return strategies to more aggressive, yield-driven approaches aimed at maximizing returns. In addition, this development lays the foundation for providing customized lending pools to third parties (e.g. projects, fund managers, institutions), which are carefully reviewed by Kamino's internal risk committee and external risk experts.
Tools that provide strong returns have always been a core focus of any sustainable DeFi protocol with a long-term vision. However, maintaining the integrity of the protocol and protecting users must be equally prioritized. In the field of on-chain finance, this is particularly important because core protocol mechanisms often revolve around leverage and rely on the accuracy of oracles.
Scam protection
With this in mind, Kamino has invested significant effort in reshaping its proprietary liquidation engine to ensure solvency and protect users from liquidation unless absolutely necessary. One exciting feature included in this change is the identification and subsequent rejection of sudden, momentary price fluctuations, which are often referred to as "scam candles" and are notorious for causing unexpected liquidations due to abnormal oracle responses. While these events may not occur frequently, users are still susceptible to liquidations under normal circumstances.
Liquidation Auction
In the event of a liquidation, borrowers will benefit through an auction process, with competitive bidding reducing penalties, thanks to the introduction of limit orders. Those in this situation may face lower penalties than traditional fixed-fee liquidations, making the entire experience less harsh and mitigating any price impact from large forced liquidations.
integral
Kamino offers points to borrowers and lenders, and rewards are multiplied for specific actions or the use of certain products. Currently, Season 3 points are underway, and looking back earlier this year, Season 1 ended in May and accounted for 7.5% of the $KMNO supply, while Season 2 lasted for three months (May to July) and accounted for 3.5% of the $KMNO supply.
Although the end date of Season 3 has not yet been confirmed, it can be speculated that its duration is similar to Season 2, which is 3 months, so it will end at the end of October. Looking at the points dashboard, there are currently 232,000 accounts earning points, and the total Season 3 points supply is 441,411,636,112 points (411 billion) as of October 16th. Assuming that Season 3 ends on October 31st and there are no large total locked value (TVL) changes in the next two weeks, the total points for Season 3 may be around 514 billion. But be cautious with this number.
in conclusion
Since its launch in 2022, Kamino has become a DeFi powerhouse on Solana with multiple products and integrations (such as Ethena, PayPal, etc.). Kamino has promising growth prospects due to Solana's continued momentum and the upcoming launch of Kamino V2. We will keep a close eye on this decentralized application and dive deeper into its revenue model and earnings opportunities in future reports.
