Ajna Opens Your Eyes to Truly Permissionless DeFi
Learn How This Zero-Dependency Protocol Is Aligning Capital, Risk Management, and Ethos
Ajna Finance launched on Ethereum Mainnet in July, and it was big news. The major crypto media outlets covered it, and why wouldn’t they? Ajna is a DeFi playground built by veterans from MakerDAO, and it enables anyone to permissionlessly create a lending pool for nearly any digital asset. In that way, it’s very much the spiritual successor to Rari Capital’s Fuse Pools, an innovative protocol that failed after suffering from an $80 million reentrancy attack last year.
Taking lessons from Maker, Curve, and the Rari exploit, the Ajna team has created a DeFi protocol that operates without external dependencies like price oracles and protocol-level governance. Ajna’s pools enable anyone to collateralize ERC-20 and ERC-721 tokens to gain easy access to leverage, with the ability to short tokens, take long positions, and earn interest on limit orders.
In other words, Ajna was built to address many of the concerns plaguing DeFi, such as:
- Risk from external dependencies, such as price-oracle manipulation and protocol-level governance which affect interest rates and collateralization ratios.
- The prevalence of permissioned lending pools that severely limit the ability of users to utilize their digital assets, whether ERC-20 or ERC-721 tokens.
- The inability of users to access short markets.
These concerns are not unwarranted. In the past two years, we’ve seen numerous oracle exploits drain pools and protocols through manipulation of price feed data in combination with flash loan attacks. We’ve also seen the effects of Machiavellian protocol governance at projects ranging from Maker to Curve, and while not all governance intervention is inherently bad, some actions can destabilize a protocol. As we saw with the Curve wars, governance interventions are almost always less efficient than letting markets determine protocol parameters.
To eliminate external dependencies and create truly permissionless lending pools, Ajna has:
- removed protocol-level governance, meaning there are no bribe networks.
- eliminated external price feeds, meaning there is no oracle manipulation.
- fixed its contract, so it’s not upgradable.
- built a platform that allows anyone to create a lending pool with any ERC-20 or ERC-721 token as collateral.
Finally, it’s worth noting that Ajna’s smart contracts have undergone six (6!) separate audits, so even though it’s not as battle tested as the DeFi OGs, they’ve worked hard to ensure the smart contracts are as secure as possible.
Risk-Averse Protocol Design x Multiple UIs = Good
Users can interact with Ajna through integrators like summer.fi, and soon others. At this point, summer.fi is where all the action is. Summer.fi began its life as Oasis, a frontend for minting DAI. Today, summer.fi offers traditional lending and borrowing functions, as well as easy-to-access leverage, through not only Ajna, but also Aave and Maker.
Right now is a particularly great time to use Ajna on summer.fi, as there are a number of AJNA-incentivized pools where users receive AJNA token rewards for using the protocol. These rewards vary, and more details can be found on summer.fi’s blog and in their GitBook.
William Peaster of BanklessHQ wrote a great step-by-step guide on how to borrow and lend on the summer.fi-powered Ajna, so rather than repeat that I’ll focus on other details about the protocol, starting with the protocol design itself.
Ajna Is Built To Create Healthy Capital Markets
Lending and borrowing into pre-existing asset pools will be familiar to users of the major DeFi protocols, but note that you may encounter minimum borrowing requirements.
The minimum borrow size is 10% of a given pool’s average loan’s debt. For the above pool, that number was 2,631 USDC, which would require a deposit of well over 5 ETH of collateral to utilize the pool.
Hard-coded protocol parameters such as minimum borrow size ensure a healthy market, and the same goes for enabling long and short positions, user-initiated liquidations, and auto-adjusting interest rates depending on pool utilization. What Ajna has done is create a playground where it’s safe to try DeFi experiments, where power users can take advantage of a robust, yet flexible, protocol to design custom positions in almost any asset. The end result is a supercharged set of smart contracts whose value is only beginning to be discovered.
Ajna Is at Its Best When You Put It To Work
Let’s be clear: Ajna works well for traditional lending and borrowing functions, but its real power is uncovered when you begin to understand how to use it for more advanced use cases, such as shorting tokens and using leverage.
Shorting Tokens With Ajna
One of the most versatile use cases for Ajna is that it enables users to short nearly any token, which helps market makers create efficient sell-side liquidity and speculate on declining token prices — essentials for an efficient capital market.
To short a token:
- Navigate to the Borrow section and scroll down until you see the prompt to ‘Search custom pools’.
2. Select ‘Search custom pools’ and a page will pop up enabling you to search for existing pools with a pool address, collateral token, or quote token. I woke up feeling bearish on PEPE, so let’s walk through how to short it. To start, you’ll need to hold stables and PEPE.
3. Since this pool doesn’t exist, we’ll create one! Select ‘create one by yourself’ to continue. In this next screen, you’ll input the required fields, including the contract addresses for the ‘quote token’ — the token you want to short — and the ‘collateral token’, which must be a stablecoin.
4. Once the pool has been created, you can deposit the quote token into the contract. For this short, I’ll deposit 800 DAI into the pool.
5. Now that we have some DAI in the pool, we need a lender to come in and deposit some PEPE. For the sake of this demo I’ll connect with a different wallet to deposit the PEPE, but in the wild, shorters need a lender to supply the quote token. You can monitor this by setting up onchain alerts, actively monitoring your position in the Ajna dashboard, or by X posting and tagging your frens to ask them to supply you with PEPE to short:
Lending a Token Others Want to Short
To enable the shorter to complete their trade, a lender must deposit the quote token into the pool:
- When depositing quote tokens into a pool, you’ll need to input the quote token lending price. The lending price is essentially the loan-to-value ratio. I’m going to set the LTV at 50% which will enable the shorter to take up to 50% of their collateral as debt.
- After signing all the necessary transactions, the PEPE lender is able to manage their position, including adjusting collateralization ratios.
Back to Borrowing
Now that there’s PEPE available to borrow in the pool, we can head back to the other side of the transaction. After the quote token deposit, I’m able to borrow PEPE, the selling of which acts as the short position. As the price of PEPE declines, it will require less capital to repay the loan, thus effectuating the short.
Ajna’s protocol design enables this type of shorting, but notice I was only able to borrow 15 PEPE. This is what it looks like to run a protocol that lets people do DeFi their way, while providing rails to help keep people and their funds safe. Enabling users to create any shorting market for an ERC-20 is a huge advantage for any protocol, but giving users easy access to measured leverage is equally potent.
Lower-Risk Leverage on Ajna
Taking advantage of leveraged positions is as simple as lending and borrowing. After navigating to the Multiply page, users can choose to borrow or deposit assets into a pool to earn AJNA rewards.
As with lending and borrowing, the user interface is simple, and users just need to deposit collateral to start. The strategy for Long cbETH/ETH is too tempting, so let’s take a quick look at that.
To begin:
- Obtain cbETH.
- Review the position below, and notice the ~80% LTV — which would require cbETH to depeg by more than 10% to force liquidation — and the multipliers.
- Set allowances and deposit cbETH, in this case 0.5 cbETH. This step can be gas intensive.
- After creation, you can manage your position, including borrowing against your collateral.
Given the gas fee required to set up this type of leverage play, it makes sense to either do it for the long-term conviction plays or with a large enough stack where the yield and rewards justify the expense.
The way to build more leverage is to use the multiply feature. It uses the long position to borrow stables against the collateral, re-swaps that into cbETH, and repeats until you can’t borrow anymore. These strategies are not for everyone, but for those who are seasoned DeFi users, such access can be its own force multiplier.
Opening Up To Truly Permissionless DeFi
Rarely do articles about new DeFi protocols invoke ancient languages, let alone mysticism. In Sanskrit, Ajna is the third eye, the unconscious mind, the source of intuition. As it turns out, Ajna is also the perfect name for a lending protocol that doesn’t rely on external dependencies to help manage the system and instead enables users to do almost anything.
Ajna is easy to use for a novice DeFi user, but it really shines in the hands of DeFi power users who understand how to take full advantage of the protocol. There’s so much more Ajna offers, from the ability to manually liquidate users’ positions to earning interest on limit orders. Ajna will be broadening its offerings later this year, but for now you can explore what it means to participate in a truly permissionless lending; no knowledge of Sanskrit required.
Author Bio
Hiro Kennelly is a writer, editor, and coordinator at BanklessDAO, an Associate at Bankless Consulting, and will always be a DAOpunk.
Editor / Designer Bio
Trewkat is a writer, editor, and designer at BanklessDAO. She’s interested in learning about applications for blockchain and NFTs, with a particular focus on how best to communicate this knowledge to others.
BanklessDAO is an education and media engine dedicated to helping individuals achieve financial independence.
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