TL;DR

• Seneca is a Collateralized Debt Position protocol that allows users to use Yield-Bearing Assets (YBAs) as collateral for borrowing senUSD, which is Seneca’s native stablecoin.

• By unlocking the value of YBAs including LSTs, LP tokens, Deposit Receipts, Principal Tokens, and more, Seneca can become the top source of credit in DeFi

• Seneca allows you to borrow against these assets whilst continuing to earn yields on them, thereby unlocking the full value of multiple underserved multi-billion dollar markets

How Seneca Is Revolutionizing The CDP Protocol Model By Unlocking The Multi-Billion Dollar Opportunity Offered By Yield Bearing Assets

At its heart, Seneca is a Collateralized Debt Position protocol for Yield-Bearing Assets. Later in this article, we’ll be diving deeper into what YBAs are and how Seneca uses them to unlock the vast value trapped in idle liquidity. But first, let’s take a look at what CDPs themselves are and how they work.

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 no regular CDP. Instead, it will disrupt the entire CDP market by creating a completely new model for what kinds of assets can be used as collateral to borrow against. The traditional CDP model can be exemplified by protocols such as MakerDAO, which predominantly accept assets such as ETH and other Ethereum-based assets as collateral. However, there are currently a whole range of Yield-Bearing Assets (YBAs) that still cannot be used as collateral on existing CDP protocols. That leaves a whole range of blue-chip assets stranded from DeFi lending markets, with billions of dollars of value left idle. This is the problem Seneca seeks to solve by offering the users the option to use YBAs as collateral to borrow senUSD on its CDP platform.

So, let’s dive into how it intends to do that…

What Are YBAs & How Will Seneca Unlock Their Value To Dramatically Improve DeFi Capital Efficiency?

YBAs are any DeFi asset where the holder accumulates yields just by holding them. They include assets such as Liquid Staking Tokens (LSTs), LP tokens, Deposit Receipts, Principle Tokens, and Yield-Bearing Stablecoins. YBAs represent a vast source of unexploited value in the CDP market as they make the ideal collateral option for borrowing against. This is because currently there is a scarcity of options for YBA holders to realize the full value of their assets.

So, their YBAs remain idle, with very few opportunities to leverage them, meaning the only way to free up capital is to sell them. Seneca solves this by offering users the option to use their YBAs as collateral to borrow its stablecoin, senUSD, against. This creates a win-win situation for users. Whilst they accumulate the yields from their YBA, they can simultaneously leverage the asset as collateral to take out senUSD loans. This compounds their yields and creates a whole new range of opportunities for extracting value from what was previously an idle asset. Holders of YBAs no longer need to choose between accumulating yield or selling their assets. Instead they access senUSD loans that can be used for a variety of DeFi activities, whilst retaining their YBAs and the yields associated with them. So, Seneca now allows users to unlock & extract new value from an unexploited source of deep liquidity. This brings heightened capital efficiency and financing to DeFi's sleeping giants: billions of dollars of idle YBAs.

Now, the reason that Seneca represents such a big leap forward for the DeFi lending market is that it won’t just offer the option to use a single class of YBA as loan collateral. Instead, it will be the first protocol to accept a whole range of different yield-bearing asset classes as collateral.

So, let’s look at some examples of the types of YBAs that Seneca will be aiming to unlock the value of by accepting them as collateral for senUSD loans…

How Seneca Will Allow Users To Leverage The Value Of An Unprecedented Range Of Yield-Bearing Asset Classes

Seneca’s long-term vision is to provide a lending protocol where every kind of YBA can be used as collateral in order to unlock the full value of all sources of idle liquidity. So, let’s take a look at some of the classes of YBAs that Seneca could accept as collateral:

1. Liquid Staking Tokens (LSTs)

Of course, Liquid Staking Tokens (LSTs) have been the YBA that has attracted most attention recently, with LST-backed stablecoins widely seen as a key use case. As you will see, Seneca goes far beyond this model to target a full-range of currently unexploited YBA collateral options. However, the LST use case remains an important one, so in addition to expanding beyond it, Seneca will also be innovating the LST-backed stablecoin model.

Liquid Staking Tokens (LSTs) are tokens that DeFi users receive as receipts for their ETH holdings when they stake their ETH through staking pools such as Lido and Rocket Pool. As their staked ETH accumulates rewards, these yields are recognised in their LST holdings (either by an increase in the value of the LST tokens themselves, or by a transfer of additional LST tokens to the holder). This allows users to unlock the liquidity of their staked assets, whilst still generating yields from them. They therefore offer a paradigmatic example of a YBA.

With Seneca, users will be able to put up their LSTs as collateral to borrow senUSD. This gives them the ability to keep getting paid ETH rewards for staking whilst also borrowing against their position, unlocking a further level of liquidity. Additionally, Seneca will introduce an innovative concept in LST-backed stablecoin loans through the creation of isolated lending pools called Apricus Chambers. These isolated lending pools will mitigate the overall "bad debt" risk to Seneca, allowing the platform more freedom to offer very competitive LTV ratios.

But Seneca is much more than just an LSDfi project. It is unique in its vision to go beyond LSTs to  unlock the value of all YBAs. Here are some of the other YBA options Seneca could accept as collateral…

2. LP Tokens

Liquidity Providers (LPs) are DeFi users who deposit assets into pools on Decentralized Exchanges (DEXs) to provide liquidity to the protocol. In return for providing liquidity, they earn trading fees, which are paid in the form of LP tokens. Billions of dollars are currently deposited into DEXs with the goal of earning these LP tokens, however a sizable portion of them remain idle.

By accepting LP tokens as collateral for senUSD loans, Seneca can unlock their full value and deliver further increases to DeFi capital efficiency.

Let’s take the example of Balancer Pool Tokens (BPTs) which LPs on Balancer receive in return for providing liquidity to the protocol. An LP might provide liquidity to an ETH-USDC pool on Balancer and in return they’d receive trading fees. In fact, LP tokens can even interact with LSTs. For example, an LP might provide liquidity to a pool comprised of LSTs such as a wstETH/WETH pool, which would also accrue trading fees. In either case, they could then use their BPTs as collateral to borrow senUSD on Seneca, thereby unlocking further liquidity whilst still earning yield from Balancer.

But LP tokens aren’t the only opportunity for expanding beyond LSTs to unlock the value of a full range of YBAs on the Seneca protocol. Deposit Receipts are another exciting and underexploited type of YBA, which we’ll now turn our focus to…

3. Deposit Receipts

There are various DeFi money markets such as Aave that allow you to deposit assets and receive a token that serves as a receipt of that deposit. These Deposit Receipts currently represent another underexploited form of YBA as their application is usually limited to the platform that mints them. By offering users the opportunity to use these Deposit Receipts as collateral for borrowing senUSD, Seneca offers up a new credit line for holders who otherwise have few options.

Let’s take the example of Aave’s aUSDC. When a user deposits USDC into Aave, they receive an equivalent amount of aUSDC in return at a 1:1 ratio. However, there are few available markets for holders to exploit the value of their holdings. By allowing users to leverage their aUSDC tokens to receive credit in the form of senUSD, Seneca therefore unlocks another source of trapped liquidity.

In our next article, we’ll be diving deeper into further opportunities for extracting value from Deposit Receipts on platforms such as Radiant and Torus. As you can see, once you start looking, there are almost limitless applications for Seneca to open up credit lines for currently underserved users.

4. Principal Tokens

Another type of exotic collateral that is currently underexploited by CDP protocols is Principal Tokens. Principal Tokens serve a function in platforms such as Pendle, which allow users to access an asset’s future yield. In the case of Pendle, it achieves this by allowing users to deposit yield-bearing assets then giving them two types of token in return, namely Principal Tokens and Yield Tokens. Principal Tokens represent the value of the initial deposit, whilst Yield Tokens represent the value of the expected Yield.

As an example, a user might deposit wstETH on Pendle, in return for which they’d receive Principal Tokens representing the value of their wstETH deposit and Yield Tokens representing the value of the future expected yields that the wstETH generates.

Seneca can offer holders of Principal Tokens a way of putting their tokens to work. By leveraging them up on the Seneca platform as collateral for borrowing senUSD, they can extract further value from their Principal Tokens rather than letting them sit idle.

So, whether it's LSTs, LP tokens, Deposit Receipts, or Principal Tokens, Seneca can offer DeFi users unique new opportunities for putting their idle YBAs to work to improve their capital efficiency. But another option that we haven’t yet discussed, which offers a perfect-fit as CDP collateral, is yield-bearing stablecoins themselves. Let’s have a look at how that would work…

5. Yield-Bearing Stablecoins

Yield-bearing stablecoins offer users the opportunity to earn interest simply by holding the coin itself. But what if they could further compound that yield by borrowing against their holdings as they accumulate yields? This is what Seneca can offer. By accepting yield-bearing stablecoins as collateral for senUSD loads, Seneca will allow users to raise further funds whilst still continuing to earn yields on their underlying assets. In fact, stablecoins such as these serve as ideal collateral for DeFi lending. This is because they are the least likely to get liquidated due to their low volatility, which ensures the depostors can receive very high Loan-To-Value (LTV) ratios. Meanwhile, Seneca’s Apricus Chamber isolated lending pools will further mitigate risk, allowing the protocol to offer even better value to lenders.

Up Next: Omnichain Functionality, Root Ecosystem Partnerships, Additional Deposit Receipt Applications, And More…

LSTs, LP Tokens, Deposit Receipts, Principal Tokens, and Yield-Bearing Stablecoins offer some exciting examples of how Seneca can unlock the full range of currently idle YBAs to become the top source of credit in DeFi. In doing so, it can exponentially increase the capital efficiency of the DeFi ecosystem and free up billions of dollars in underutilized assets.

However, this article just scratches the surface of Seneca’s vision for revolutionizing DeFi lending by offering credit to a vast market of underserved users. In upcoming articles in this series we’ll be discussing how Seneca will leverage LayerZero to deliver a truly omnichain experience. We’ll also be explaining how it gains an additional competitive advantage through its integration in the Root ecosystem, whilst diving into further markets that Seneca can serve in the world of Deposit Receipts.

Until then, you can stay on top of all things Seneca, by joining our Discord at: https://discord.gg/senecaprotocol