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“Man is by nature, a social animal” — Aristotle

Effective social coordination is a precondition for human development and flourishing on an individual and collective basis. In any flourishing era of history there was always a robust legal and economic layer governing the rules of life: spiritual, social, and economic. In the case of the latter, there are already old records of such coordination: as far as Ancient Mesopotamia palaces and temples lent at an interest rate of ~20% per year, and in Medieval Europe the Medici’s were able to dignify usury and create the closest thing to a modern day bank.

Code of Hammurabi, recognised as the oldest legal texts dating from 1755–1750 BC. In it, laws ranging from criminal law, property law and commercial law to even the regulation of professional men — often in the form of ‘if … then’ statements.

Up till now, middlemen and institutions have always played a central role in social coordination.

But why?

The question (or problem) is one of trust. Inherently we don’t trust people we don’t know, especially when it comes to money. After all, why should we lend to a stranger if we have no idea if she will repay? This is where trusted middlemen and institutions come in — we trust professionals who are licensed, institutions that are audited and their expertise. In the case of money-markets, banks are serving as the intermediary assuming the counterparty risks. Success.

But one major factor banks have been unable to solve for is equality. As Esther George, president of the Federal Reserve Bank of Kansas City said, “Being able to save and borrow money on fair and equitable terms is very much at the heart of financial security.”, yet the underrepresented have systematically been kept out of the banking system. These barriers, decided on by one’s race, geography, and/or class perpetuate socio-economic inequality.

Tearing Down the Old Guard

Blockchain technology has enabled new ways to record information. Combined with programmable actions it has enabled new, trustless and decentralised ways of coordination. Now, people are re-creating the primitives of finance in a decentralised and anonymised manner. For money-markets, while their most basic form has not changed — depositors still put in their money to earn a yield while borrowers pay an interest on their loan — the transparency and level of interaction between participants has been redefined in the following areas:

  1. Privacy: Borrowers no longer need to disclose their identity when borrowing because loans are overcollateralised and held in smart contracts.
  2. Custody: Both sides hold their own assets.
  3. Fairness: Everyone is entitled to the same pools and rates that they wish to participate in.
  4. Transparency: Information around each pool’s supply, demand and interest is clearly stated upfront and enforced on-chain.

The role of the bank is effectively replaced by the above infrastructures relying on smart contracts to execute on transactions ranging from deposits to liquidations.

Well-known protocols such as Aave and Compound found success and were able to prove that this is a viable business model where everyone can win — borrowers, lenders, and protocols. Yet it’s easy to forget that we are only at the very first chapter of DeFi development and there are still great inefficiencies that exist and can be addressed. So what’s next?

The Issues of DeFi MMs

Standing on the shoulders of giants — both Aave and Compound, but also the banks that have come before us, zkLend aims to define the next generation of money-market protocols. The first iteration of our product will primarily address inefficiencies in existing projects while also targeting a new segment of users. But before we go any further, let’s dive into current issues we observe:

  1. Financial and Technical Risk management

There are two kinds of dangers risk must account for: the first is when something doesn’t work as you intend it to and the second when something works as you intend it to with unintended consequences. Examples of the first case could be the two-day Solana network outage back in mid-Jan. High network congestion locked users out of the system, but large price fluctuations led to automatic liquidations on Solend before users had time to top up their positions. By the time the network was functioning as normal, users found their collateral liquidated by bots and took a loss that would’ve been avoidable. An example of the latter would be like the shocking Cream exploit, where the protocol worked as intended but exploiters were able to manipulate the price per share for the yUSD vault. The protocol itself fetched the prices correctly, but it was exploited.

There is a greater challenge managing risk from both these types of danger, as DeFi TVL continues to grow it is becoming more important that protocols are designed from the ground up with financial and technical risk in mind — especially for retail adoption and institutional trust. Prescriptively this may mean, (by no means exhaustively) a team with equal parts finance and tech, formal auditing, and collateral risk strategy among others.

2. Undercollateralised Lending

There’s still lots of slack left for DeFi money-markets before they catch up to their TradFi counterparts they are trying to emulate, one such feature that remains the holy grail is undercollateralised lending. Current protocols require collateral ratios as high as 800%. Even with ‘looping’ / ‘zapping’ with more ‘degen’ borrow offerings and the possibility of interest bearing / staked assets as collateral, these innovative DeFi native solutions alleviate some of the capital inefficiency without solving the plague of overcollateralisation. Indeed, there are some great protocols looking into this space, but its mainstream adoption remains limited.

3. Unaddressed Institutional Potential

In financial services and products: size matters whether in TradFi (…institutions, HFs, family offices) or DeFi (…whales from the BTC era, the ’17 ICO generation or nouveau NFT rich). Crypto natives are comfortable with flash loans, arbitraging with bots, yield farming on leverage and flipping metaverse digital assets, but it was only recently that institutions have been forced not only to recognise digital assets but the real potential of DeFi in investment and operational terms.

Ultimately this begs the question: who’s serving the institutions using this new tool of socio-economic coordination? Clearly, the DeFi community as a whole has a lot to gain if they are able to win over the trust (and wallets) of institutions. If only as little as 1% of assets under management from the world’s 100 biggest banks were invested within DeFi, it would amount to $1T of capital into the industry. Similarly, the symbiosis is evident: DeFi offers Wall Street an overhaul of how financial services are delivered (read: value), offering automated, transparent, customisable, open bazaar-like innovation and composable ‘plug and play’ financial legos.

Enter zkLend

zkLend is an L2 money-market project built on StarkNet, combining zk-rollup scalability, superior transaction speed, and cost-savings with Ethereum’s security. Our project encompasses two protocols — Artemis and Apollo, with the former catered to the needs of DeFi users while the latter focused on compliance conscious institutional players. Though operationally independent at the start, the two protocols can ultimately leverage one another to maximise capital efficiency.

By leveraging the synergies of our two offerings, we want to build the next legacy of finance by fusing tradition with innovation. This means asking questions like:

  • What makes a great borrowing and lending service and product for DeFi users?
  • How can we grow together with developers and users to build a community with soul?
  • How do we use risk measurement tooling from TradFi to DeFi borrowing and lending?
  • How can retail users lend to institutions uncollateralised?
  • How do we bridge the gap between DeFi and centralised finance?
  • How can we mould the next-gen borrowing and lending model?

Sneak Peek into Artemis and Apollo

Without giving the game away, here’s a small sneak peek into some features of Artemis V1:

  • Native to StarkNet: The first to market general purpose zk-Rollup technology. Proven scalability. Close native Starkware community ties from Day 1.
  • A focus on long-tailed assets: Support for less-liquid assets like blue-chip NFTs and long tail collateral. Expertly balanced with stringent financial and technological risk control.
  • Algorithmic interest rate curves: Smooth user experience with reactive interest rates with a variable speed of acceleration based pool utilisation.
  • Ouroboros incentive rewards: Native and partner token rewards with a focus on incentivising fee-generating activities.

Meanwhile, Apollo V1 will feature:

  • Tradfi standard compliance layer: Stringent compliance, KYB and KYC compliance checks for compliance conscious entities.
  • Undercollateralised lending: undercollateralised loans made available to institutions. Full discretion for participating lenders.
  • Stability and predictability: Fixed-term interest rates and locked agreements to offer long term financial products

So What’s Next?

Building with conviction and agility we’re still only on Chapter 1… We’re ready to lift off. Are you?

About zkLend

zkLend is an L2 money-market protocol built on StarkNet, combining zk-rollup scalability, superior transaction speed, and cost-savings with Ethereum’s security. The protocol offers a dual solution: a permissioned and compliance-focused solution for institutional clients, and a permissionless service for DeFi users — all without sacrificing decentralisation.

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zkLend is an L2 money-market protocol built on StarkNet, combining zk-rollup scalability, superior transaction speed, and cost-savings with Ethereum’s security.