The practices of borrowing and lending have been around since the inception of financial markets, enabling market participants to lend capital to those who may need to borrow it in exchange for a premium known as interest. However, over the course of time, financial services have become largely inaccessible for many people across the globe as TradFi service providers imposed requirements, i.e., credit score, proof of income, etc, which pose critical barriers to entry for many. This gave rise to the premise of building decentralized alternatives to financial services, such as borrowing and lending.
Decentralized borrowing and lending protocols allow anyone with the capital to borrow or lend funds through a self-custody wallet. Smart contracts enable automated borrowing and lending functionality to replace the inefficiencies of central intermediaries. The concept dates back to the launch of Maker in 2018, which enabled anyone to borrow the DAI stablecoin by depositing their ETH into a smart contract as collateral, the first iteration of a decentralized borrowing protocol.
This model introduces robust risk management considerations, such as requiring the value of collateral to be greater than the value that can be borrowed, enforced through programmed collateral requirements and liquidation thresholds. As a result, decentralized borrowing and lending markets remain one of the most critical verticals in DeFi.
Solana Lending Markets Today
Today, lending markets on Solana have accrued up to $1.53B in value, accounting for nearly a quarter (23%) of total network TVL. Borrowers and lenders can access a variety of assets, from LSTs to memecoins to stablecoins, across different permissionless protocols, each providing their own respective markets with varying borrow and lend parameters. In order to bootstrap liquidity, some protocols may offer incentives for borrowing and lending activity, such as token emissions or, more commonly today, points programs.
Lending Platforms on Solana
There are several markets available today on Solana for users to borrow and lend assets. It’s important to note certain parameters, such as the borrow/supply caps, loan-to-value, and the APY, vary by individual market and are dependent on the autonomous interest rate algorithms programmed into the underlying smart contract code.
Kamino Finance
Kamino Finance was originally created to offer users the easiest possible way of providing liquidity and earning yield on-chain.
The protocol's one-click, auto-compounding concentrated liquidity strategies quickly became the most popular LP products on Solana, and laid the foundation for what Kamino is now.
Today, Kamino is a first-of-its-kind DeFi protocol that unifies Lending, Liquidity, and Leverage into a single, secure DeFi product suite. On Kamino, users can:
Borrow and lend their assets
Provide leveraged liquidity to concentrated liquidity DEXs
Build their own automated liquidity strategies
Use concentrated liquidity positions as collateral
Kamino's product suite is packaged into an industry-leading UX that offers transparent analytics, detailed performance data, and extensive position info.
Their Products
Borrow and Lend ; Earn Interest and Borrow
Multiply Vaults; Boosted SOL Yields
Long/Shorts Vaults; Increase Your Exposure
Liquidity Vaults; Automated LP Strategies
DIY Vault Creator; Custom LP Strategies
MarginFi
Marginfi is a fully-decentralized borrowing and lending protocol built on Solana. With marginfi, you can access native yield, embedded risk systems, and off-chain data plug-ins all in one place. Use marginfi to access the margin you need, when you need it.
Features
End-to-End Risk Engine: Constantly monitors the health of each individual bank, covering the entire protocol's risk comprehensively.
In-House Liquidators: While marginfi has in-house liquidators, the protocol also encourages and includes a significant number of external liquidators to ensure a robust and efficient liquidation process.
Market Depth and Recovery Modeling: Gathers data to model market depth and recovery time, enabling predictions of future liquidity in various market scenarios.
Dynamic Risk System: Plans to implement live bank updates directly from risk models for a dynamic and real-time risk management system.
Global Borrowing and Lending: The protocol enables borrowing and lending of margin under a unified global context, streamlining the process for traders.
Leverage Trading: marginfi supports trading with leverage, empowering traders to maximize their market participation.
Comprehensive Market Access: Traders can optimize their financial exposure across over 100 DeFi projects on Solana, including spot, futures, and options markets.
Solend
Solend is the autonomous interest rate machine for lending on Solana. Earn interest and borrow 74 assets across 22 pools on the fastest, lowest fee, and most scalable DeFi lending protocol.
Solend is an algorithmic, decentralized protocol for lending and borrowing on Solana.
Lending and borrowing has proven itself as key in a DeFi ecosystem. However, current products are slow and expensive. On Solana, Solend can scale to being 100x faster and 100x cheaper. Solend aims to be the easiest to use and most secure solution on Solana.
With Solend, you can do the following:
Earn interest
Borrow
Leverage long
Short
Risks
All DeFi protocols, including Solend, come with risks, which are important to understand before depositing significant amounts of crypto. The main risks involved in using Solend are outlined here.
Smart Contract Risk
This is a risk that the Solend smart contracts get exploited to steal or permanently freeze funds. This risk is inherent to all smart contracts and can never be fully eliminated, but can be mitigated in various ways.
Solend has undergone audits by Kudelski, Neodyme, and OSEC.
Solend has a bug bounty program which will pay up to $1MM if a critical vulnerability is found, in order to encourage responsible disclosure rather than hacking.
The Solend smart contracts have been live on mainnet with hundreds of millions in total value locked (TVL) since 2021.
Jet Protocol
Jet Protocol is an open source, non-custodial, borrowing and lending protocol on the Solana Blockchain.
Jet Protocol is governed by the JetDAO. The JetDAO is comprised of a community of DeFi contributors, Developers, the Governance Committee and $JET token holders.
Assets (SPL tokens) are onboarded to Jet by the JetDAO. Assets are considered as more or less risky for the protocol during onboarding by governance.
The riskier assets can be weighted such that they don't count towards collateral in a margin account at all, while the least risky assets such as USDC can provide up to 15x leverage.
Factors that play into the risk are the amount of a token's on-chain liquidity (necessary for liquidation events), ubiquitousness DeFi to such as USDC with consideration towards regulatory and reputational risk as well.
Jet Products
Margin Pools (Variable Borrowing and Lending)
Margin Accounts
Margin Trading - Leverage Swaps
Fixed Rate Borrowing and Lending (orderbook-negotiated rates)
Airspaces (future release)
JetGovern
Hubble
Hubble is a decentralized finance (DeFi) protocol built on Solana. Hubble's core product is USDH, a decentralized stablecoin that can be borrowed against your crypto assets. Users can deposit multiple crypto assets like SOL, ETH, and kTokens to borrow USDH. In turn, USDH can be used to serve various purposes across Solana DeFi.
Hubble will offer multiple USDH borrowing vaults, with various asset combinations and vault-specific parameters such as Stability Fees and Deposit Caps. USDH borrows are guaranteed by a combination of Hubble's USDH Vault (Stability Vault), and bots that facilitate market-based liquidations.
The USDH that users deposit into the USDH Vault is used to pay off bad loans, while depositors earn a net positive ~10% difference in liquidated assets.
In the coming phases of development, the protocol will launch various products and services to bring further utility to the platform, and USDH itself.
Borrowing made easy, cheap, and attractive
SOL, BTC, ETH, etc. holders, motivated to keep the upside to their portfolio, can deposit their assets and borrow USDH to use it across various protocols on Solana. While a user's loan is active, their assets retain full exposure to the market.
Upon paying back their debt, users will regain access to their collateral. If the value of their collateral increased while it was deposited, they receive that entire value back upon repaying their debt.
Loans have no fixed maturity, so debt owners can pay back their debt whenever they wish.
Earning yield on collateral
In addition to keeping the upside on collateral, users can earn yield on their deposits. At present, this is facilitated by Hubble's onboarding of yield-bearing collateral. Hubble currently accepts mSOL, stSOL and daoSOL as collateral, with numerous other yield-bearing assets being onboarded imminently.
In the future, users will be able to opt-in to have their collateral allocated to partner protocols to earn yield. Users will have the freedom to choose from multiple yield-earning strategies.
Governance for the benefit of the community
Decentralized governance, in order to be meaningful, needs to allow the most active participants in the community to have an effective voice. To incentivize participation we are combining features of existing models that we find work best, especially:
General directive proposals where development work from the core team is dictated by the community, once a quarter.
Group proposals where the community can unite to make a proposal even if individual voters wouldn’t have enough voting tokens.
Conclusion
Though Solana’s lending markets may pale in size relative to that of Ethereum, it is important to consider that the first decentralized borrowing and lending platforms, which still make up the majority of lending TVL today, originated at a time with fewer available environments to build on, therefore benefiting Ethereum as a first-mover. Solana offers superior performance in throughput and speed, and though Solana’s lending markets hold just 10% of the value on Ethereum today, Solana’s lending TVL is up over 4000% post-FTX-collapse. Solana users can access key financial services like borrowing and lending, allowing them to maximize the capital efficiency of their assets.
The onset of decentralized borrowing and lending services has enabled new mechanisms for capital efficiency through the use of digital assets. As the adoption of crypto services continues to advance, it could be imagined that more people across the globe turn to decentralized borrowing and lending protocols as viable financial alternatives to their traditional and antiquated counterparts.
Disclaimer: None of the content in this article should be construed as financial advise. It is for information purposes only. Always do you own research.