Oracleless Protocols: Unlocking the Future of DeFi Lending.
Introduction
Lending and borrowing function as the lubricating oil that keeps the wheels of an economy running smoothly. Without the existence of a reliable and unbreakable lending/borrowing market, an economy can never reach its full potential. This is true for traditional economies, and DeFi is no exception here. Lending/borrowing protocols have enabled access to liquidity/leverage for Borrowers & yield generation avenues for Lenders in DeFi.
While the existing lending/borrowing protocols have developed and improved greatly over the years, their dependency on external price feeds aka Oracles leaves them vulnerable. In 2022 alone, DeFi protocols have lost $3B of user funds to Oracle manipulation hacks. Having a vulnerability at the protocol level is something completely against the core value/promise of DeFi. Similar to DEXes, a lending/borrowing protocol needs to be independent of Oracles.
The Timeswap Difference:
At Timeswap, we recognized this challenge early on and took action. We proudly introduced the world’s first oracle-less lending protocol, going live over a year ago. Our protocol has undergone rigorous testing, emerging battle-tested and proven against real-world threats. Timeswap stands as a testament to our unwavering commitment to security and innovation.
The Power of Oracleless:
Our Oracleless lending/borrowing protocol operates on an entirely market-driven model, eliminating reliance on external oracles. By placing control in the hands of the market participants, we ensure the immutability and resilience of the protocol. This groundbreaking approach paves the way for a more robust, secure, and decentralized DeFi lending ecosystem. We’ve also witnessed the emergence of a few more oraclefree markets lately. We’ll also be reflecting upon them and explaining how Timeswap differs from them.
DeFi is broken!
In a recent blog post titled ‘Why DeFi is Broken and How to Fix It, Pt 1: Oracle-free protocols.’, Dan Elitzer of Nascent made some notable points for why in its current state, DeFi is far from being acceptable for mainstream adoption. In his own words:
“Industry-wide, the frequency and severity of exploits is at least two orders of magnitude above what might be considered acceptable levels for mainstream adoption.”
In the article, he highlighted how a big reason behind these exploits is the dependency of DeFi protocols on external factors. DeFi protocols today are largely dependent on Governance, Upgradability & Oracles for their functioning. Having these dependencies will always leave scope for potential manipulation from an external party. The way to solve this is by having base layer primitives which have zero external dependencies while protocols built on top of them could have their own risk management keeping the underlying protocol independent.
“In order to qualify as a primitive, a contract must have zero external dependencies, other than those of the blockchain it is deployed upon.”
With the emergence of Uniswap, DeFi found its primitive DEX which is largely independent of external involvement for its functioning. But, the established lending/borrowing protocols are dependent on Oracles and Governance. We haven’t found the primitive in the lending/borrowing space, yet! A lending/borrowing needs to eliminate oracles for it to be independent of any external influence.
“There are a LOT of complexities involved in bringing off-chain data reliably on-chain, especially with the requirement of operating it in a decentralized, censorship-resistant manner. While Chainlink has done an admirable job of operating within these constraints, they have also become a potential single point of failure across all of DeFi.
Oracle-free protocols–really, protocols explicitly designed to allow users to Bring Your Own Oracle (BYOO)–offer an alternative path, particularly for sophisticated institutional users who have access to their own high-quality data feeds without the need for decentralization or censorship-resistance.”
From the very first day, we were set to build an oracle-free lending/borrowing AMM which works ‘Like Uniswap, but for lending/borrowing’. This is what led to our two-year (and counting ) journey of building Timeswap.
What is Timeswap; a quick rundown!
Timeswap is the first Oracleless lending/borrowing protocol which supports any erc-20 & erc-4626 tokens for lending/borrowing or to be used as collateral. Timeswap pools function using a three-variable AMM (X+Y)*Z=k for the calculation of Interest Rates (APR) and Collateral ratio (CDP) of Loans. Each Timeswap pool has three market participants:
Lenders: Lenders lend their assets in the pool at a fixed Interest rate (APR) for the entire duration of the pool. Lenders can claim the tokens Lent and the Interest accrued in full once the pool matures. They also have the option to remove their assets from the pool before the maturity date, in which case they pay a small penalty/slippage for withdrawing early.
Borrowers: Borrowers can take loans at a fixed interest rate by locking their tokens as collateral. Once a loan is issued, there’s no need for maintaining any collateral ratios with a change in asset prices. It’s a ‘Borrow and Forget’ experience for them. Borrowers can decide to repay their debt before pool maturity to claim their collateral or they can default on the debt. Loans on Timeswap follow a no-liquidations model where borrowers have an option of not repaying the loans, in which case the Lenders and LPs get a claim to their collateral.
Liquidity Providers: Liquidity providers create the market for any token to be lent/borrowed. LPs add single-sided liquidity for the asset being lent/borrowed in the pool. LPs borrow from lenders and lend assets to borrowers at fixed interest rates. In return, LPs earn fees from lenders and borrowers. They’re also subject to profit/loss from the potential Interest rate spread in the pool.
We launched Timeswap V1 on Polygon mainnet in March 2022. During the tenure of 9 months, the protocol functioned as designed, with no edge cases or intervention from the team. After observing user behaviour and taking continuous feedback from the community, we launched Timeswap V2, read more about it here.
Given the capital efficiency improvements, Timeswap V2 has surpassed +$8 million in volume within 4 months of launch (With no token incentives).
The above stats show that a Lending/Borrowing protocol can exist and function as designed without dependency on Oracles.
Up until today, we’ve launched pools for tokens ranging from Governance tokens, LP tokens, and Liquid Staked Derivatives (LSDs) to locked token receipts with no secondary market. Read about all of them here:
New oracle-free markets on the rise
In light of recent developments in the lending/borrowing space, we’ve seen some promising developments in the form of Oracleless protocols. It’s great to witness more teams realising & filling the void in the design space for DeFi lending/borrowing. All these developments are bringing crucial base layer infrastructure which is very much needed today. Let’s look into what they’re building and how it differs from the design of Timeswap V2.
Myso Finance
First up is Myso Finance. Myso is an Oracleless, peer-to-peer lending/borrowing protocol which functions on a model of Zero Liquidation Loans a.k.a ZLL. Up until today, Myso has released two major iterations of ZLLs, Myso V1 and Myso V2 namely. Every market on Myso has two participants: 1. Lenders 2. Borrowers. The parameters for the loans (Interest rate, LTV, Tenure, etc) are quoted by the lenders & Interest rates are fixed. With Myso V2, they’ve launched many advanced features which enable lenders to Quote loans with maximum capital efficiency. Now, Lenders can send concurrent loan offers across multiple assets, pairs, and quotes using a Unified vault. Loans can be quoted both onchain and offchain. Borrowers on the other hand can select the quote of their choice and borrow the principal amount by pledging their collateral. Since the loans cannot be liquidated, borrowers hold the right to repay or default on their loans.
Myso and Timeswap have many similarities in the way both markets function. There are also some key differences between both protocols:
Ajna Finance
Ajna is bringing a promising lending/borrowing infra that works for both erc-20 tokens and NFTs. Ajna is an Immutable, Oracleless lending/borrowing protocol. Loans on Ajna are perpetual meaning borrowers don’t need to repay within a particular time period. Lending/borrowing on Ajna happens in a peer-to-pool manner. A liquidity pool can be created for any pair of Quote token and Collateral token. Lenders add the quote tokens in the pool within price buckets at which they want to lend the tokens. Borrowers on the other hand borrow from these price buckets by pegging the Collateral tokens. Interest rates on Ajna are variable, determined by pool utilization and remain the same for loans across all the price buckets. Loans of borrowers can be liquidated if the pool’s Lowest Collateral Price bucket (a.k.a LUP) goes below the Liquidation price a.k.a Neutral Price(NP) of the loan. Neutral price is the Debt to collateral price plus One year of Interest.
Ajna and Myso have built a critical infrastructure that will help derisk DeFi’s dependency on Oracle heavy lending/borrowing markets. So many teams focusing on Oraclefree primitives will lead DeFi natives to migrate the lending/borrowing demand to Oraclefree protocols. Things for DeFi look exciting ahead.
Time is Money ⏳
Follow us:
Discord: https://discord.gg/timeswap
Twitter: https://twitter.com/TimeswapLabs
Medium: https://medium.com/Timeswap
Telegram: https://t.me/Timeswap
