DeFi's Status Quo
SUMMARY
Lending/borrowing protocols today are predominantly operated by centralized parties, rely on various dependencies, and are based on assumptions that may not be robust. MethLab is actively working to address these challenges.
Introduction
Lending/Borrowing in DeFi currently places trust in various actors to keep working without any malicious interference. This includes oracles, risk models, guardians, admins, and owners and so forth. Risk models are based on static Loan-to-value ratios, Interest rate models(IRMs) and reserve ratios. Oracles are used for price discovery or to discover the price and bring them on-chain for smart contracts. Guardians are used to stop the protocol's functioning and so on. This also means:
- Liquidations become essential: Borrowers must keep a track of the health factor and act continuously in accordance to the market changes and price volatility of assets. If the loan to collateral ratio goes below a certain threshold, the collateral gets liquidated for a hefty fee.
- Oracle Overheads: Oracles need to be developed, vetted, selected, integrated and then actively monitored to become a reliable part of the protocols. A vulnerability at any stage can lead to a hack, resulting in the loss of user funds. Oracles present a huge financial risk and an architectural overhead.
Each of the actors mentioned above play a crucial role in the current landscape of lending and borrowing protocols. This contrasts sharply with the vision of decentralized finance, which advocates for open finance. In this model, trust is placed in the smart contracts and the foundational blockchain technology, rather than being concentrated in the hands of a select few.
Principal-agent problem in Optimistic Protocols
About MethLab
MethLab is based on a Intent-centric liquidation-free architecture.
Robust and Secure Architecture: MethLab contracts are permissionless, immutable, and devoid of any owner/multi-sig. The architecture does not actively track the price of any asset. It's independent of any oracles, completely eliminating the risk of oracle manipulations. MethLab is a base primitive with no external dependency. The market dynamics responds to how lenders/borrowers interact with the protocol.
Liquidation-free: MethLab architecture does not map price to liquidation or any external condition. Instead, liquidation is a function of repayment and not of price action. Borrowers do not need to worry or pay any liquidation fees/incentives. If the collateral ratio changes, the collateral is still kept intact in the smart contract and borrowers can always redeem full collateral by repaying on-time.
Why MethLab?
| Parameter | Pool-Lending | MethLab |
|---|---|---|
| Interest Rate | Variable based on utilisation ratio | Fixed |
| Hypothecation | All assets are co-mingled in the same pool | All positions are isolated |
| Liquidation | By Liquidation bots who earn liquidation incentives | Liquidation-free |
| Governance risk | Suffers from recognition and impact lag | Core protocol can not be updated/changed |
| Scalability | Governance and engineering overhead | Permissionless listing |
| Market efficiency | Every user takes the market | Every user can make the market |