TL;DR

• In TradFi markets, the way leverage is structured is stacked in favor of major financial institutions, preventing everyday people from accessing its full benefits.

• Meanwhile, existing DeFi lending products are inflexible and risky with unsustainable financial models.

• Seneca’s CDP lending protocol provides flexible, yield-bearing collateral options and isolated lending pools that overcome these challenges, delivering greater capital efficiency and minimizing risk.

• This allows Seneca to bring leverage to the masses and create a genuine rival to the $8 trillion TradFi lending market.

The Problem With Leverage In Traditional Financial Markets

Leverage refers to the use of borrowed funds or debt to amplify the potential returns on an investment. It allows investors to control a larger position than what they could afford with their own capital alone. Leverage is the lifeblood of the global financial landscape, serving as the core vehicle that major banking institutions use to drive their growth. However, in traditional financial markets, the way leverage is structured is stacked in favor of these institutions with many barriers in place to prevent everyday people from benefiting in a similar way.

Before explaining why TradFi leverage models fail to meet the needs of the masses and how Seneca can help solve this, let’s take a look at how leverage works. It can be conceived of as follows:

Borrowing Capital: An individual or institution borrows money, often from a bank or a brokerage firm, to make an investment. This borrowed money is referred to as "leverage" or "margin."

Larger Position Size: With the borrowed funds, the investor can now control a larger position in an asset (e.g., stocks, bonds, real estate) than they could have with their own capital. This magnifies both potential gains and losses.

Example: Let's say an investor has $10,000 of their own money and wants to invest in a stock priced at $100 per share. Without leverage, they could purchase 100 shares. However, if they use 2:1 leverage, they could borrow an additional $10,000 to buy 200 shares. If the stock price goes up by 10%, they would make a $2,000 profit instead of $1,000 without leverage.

This all sounds great in theory, however in reality, the game is rigged in a way that disempowers regular consumers and delivers all the rewards that leverage strategies offer to big institutions. This is why:

Costly Interest-Rates: Because the institutions lending out the money to be used as leverage are highly centralized, they are able to manipulate the market to drive up the cost of borrowing. This means consumers pay levels of interest that make leverage unappealing, whilst banks receive outsized returns.

Unfair Allocation Of Risk: Banks are able to take huge risk on their own leverage strategies, knowing they are “too big to fail” so will be bailed out by governments if their risks don’t pay off. Meanwhile, the average consumer has no such protection meaning that the risk-reward dynamics are always skewed to the advantage of major institutions.

Rigid Products: Leverage products are structured in inflexible packages that are tailored to the bank’s revenue model rather than the consumer’s needs. This makes it difficult for borrowers to find leverage products that synergize with their unique strategy.

Together these problems mean that the benefits of traditional leverage markets are concentrated amongst large financial institutions. Meanwhile, the public at large is locked out from taking their share of the rewards.

In theory, DeFi with its focus on decentralization, capital efficiency and flexibility should offer an ideal solution to these problems. However, existing DeFi lending solutions have brought with them a whole new set of problems…

Why Existing DeFi Lending Solutions Have Failed To Achieve Mass Adoption

Leverage in DeFi should offer a simple and powerful proposition, allowing users to increase their exposure in order to amplify their yields. Indeed, the DeFi lending market has made some inroads into the global leverage sector, with the total value of all DeFi lending and borrowing protocols now totalling over $13bn. However this is just a drop in the ocean compared to the $8 trillion TradFi lending market. For DeFi lending to usurp the TradFi market’s dominance and bring leverage to the masses, there are a series of problems that need to be overcome:

Unsustainable Models Based On Emissions: In order to sufficiently incentivize depositors to put down assets as collateral to borrow against, DeFi lending protocols need to ensure holders receive an attractive interest rate. To achieve this, the current generation of lending protocols usually amplify returns for depositors by offering them a share of native token emissions. However, as adoption grows a small amount of native tokens is split amongst an ever-increasing userbase. This means either each individual depositor starts to receive diminishing returns or emissions have to be ramped up to unsustainable levels.

Inflexible & Inefficient Collateral Options: Meanwhile, the incumbent DeFi lending protocols mostly rely on a model of accepting ETH and other Ethereum-based assets as collateral. Because these assets are not inherently yield-bearing, this means there is no in-built mechanism for generating interest for depositors. This means a clear opportunity for providing value to depositors is missed, leading to further reliance on the kind of unsustainable models described above.

High Risk: Finally, existing DeFi lending protocols primarily rely on minting caps to control collateral levels. This exposes users to unnecessary risk as one as one new security loophole can lead to major problems for an otherwise secure lending protocol. This in turn can lead to the exploitation of the entire borrowing capacity.

All of this adds up to a situation where current DeFi lending protocols are facing similar issues of cost, risk and inflexibility to TradFi lending, albeit under a different guise.

This is where Seneca comes in…

How Seneca Solves The Problems Of Cost, Risk, & Capital Efficiency To Bring Leverage to The Masses

Seneca utilizes the familiar Collateralized Debt Position (CDP) lending model but applies a series of unique innovations that elegantly solve the current problems with DeFi lending described above.

The CDP model itself is very simple. Users can deposit whitelisted assets as collateral against which they take out loans. In the case of Seneca, users would be able to use their collateral to mint and borrow senUSD. senUSD is Seneca’s native stablecoin, which is the name given to tokens that track the value of USD on a 1:1 basis.

However, Seneca is not just a regular CDP protocol. Instead, it has deployed 3 unique features to solve the issues of cost, risk and capital efficiency faced by the DeFi lending sector. Here is a summary of how it archives this:

Accepting Yield-Bearing Assets As Collateral: It’s notable that Liquid Staking has recently overtaken DeFi lending as the second largest DeFi market behind decentralized exchanges. And yet, the DeFi lending market has failed to connect the dots and capitalize on the opportunities that Yield-Bearing Assets (YBAs) like Liquid Staking Tokens (LSTs) offer. Seneca has identified how accepting Yield-Bearing Assets as collateral provides an inherent mechanism for delivering sustainable returns back to depositors. By accepting naturally Yield-Bearing Assets such as LSTs as collateral, Seneca has an in-built mechanism for providing interest to its depositors. Meanwhile, by giving them loans in the form of its native senUSD stablecoin, Seneca allows users to free up their otherwise idle capital to engage in further yield-bearing activities. Furthermore, Seneca won’t just accept LSTs as collateral but instead aims to accept the whole range of YBAs on offer in the DeFi market, including LP tokens, Deposit Receipts, Principal Tokens, yield-bearing stablecoins and more. This provides a much more flexible solution than existing DeFi lending protocols, delivering greater capital efficiency.

Minimizing Risk: But it’s not just the issues of flexibility and capital efficiency that Seneca solves. In addition, it provides new solutions for minimizing risk for its users. When users open CDP positions, they are only liable and responsible for repaying the senUSD they borrowed. No one can repay another user’s debt or seize another user’s assets unless they are liquidated. Likewise, no one can borrow their deposited assets. This removes a lot of the risk inherent in DeFi lending, making leverage more accessible to everyday users.

Isolating Risk: In addition to reducing overall risk for its users, Seneca also isolates risks to ensure that where they do occur they do not proliferate amongst the wider user base. This is done through its pioneering Apricus Chamber feature. Apricus Chambers are isolated debt pools, which allow the Seneca protocol to separate collateral types by asset. This allows Apricus Chambers to have distinct advantages over general collateral pools. Firstly, isolated pools allow Seneca to offer collateral types with higher volatility because they keep each collateral type isolated. This leads to greater collateral flexibility. Secondly, because the pools are isolated rather than mixed, users will be able to benefit from generally higher Loan-to-Value (LTV) rates. That's because the risk is fragmented by collateral type rather than being extended to all parties automatically.

So, taken together, Seneca’s features solve each of the key problems of cost, risk and inflexibility that plague the current generation of DeFi lending protocols. In doing so, it sets the stage for wider adoption of DeFi lending, meaning Seneca can bring leverage to the masses and create a genuine rival to the $8 trillion TradFi lending market.

Get Ready For The Seneca Public Sale

As you can see, Seneca is revolutionizing both the second and third largest DeFi markets, whilst also targeting an $8 trillion opportunity. Soon, you’ll have the opportunity to be part of the revolution by taking part in the Seneca public sale, with dates being announced shortly. We’ve also got some exciting partnerships announcements lined up, the public testnet almost ready to go live, and details coming soon on the Token Generation Event. So make sure you are following us on @SenecaUSD and join our Discord to ensure you are the first to hear about it all.