An Analysis of Current DeFi Money Markets


Decentralized money markets have transformed the way people interact with digital assets, providing alternatives to traditional financial systems. Currently there exist three prevalent lending models in the space: peer-to-peer (P2P), pool-based, and isolated pools. While the majority of the Total Value Locked (TVL) in DeFi is locked in the pool-based models like Aave and Compound, we will explore how Omni improves upon them to become the first and only lending 4.0 protocol.

Source: SmartValor
Source: SmartValor

Competitive Landscape

P2P models

P2P models, like EthLend (before the rebrand to Aave) and Dharma, were some of the first models to emerge in the DeFi space. They aimed to connect borrowers directly with individual investors, cutting out intermediaries and potentially providing better rates for both parties. Although they had great promise starting out, they struggled to scale and suffered from a poor user experience and inadequate liquidity.

Poor User Experience: Users on these platforms had the flexibility to set their desired lending and borrowing rates within the constraints of the market dynamics. Lenders could choose to lend their assets at a specific interest rate, and borrowers could request loans at rates they were willing to pay. If their terms were competitive, their transactions would be more likely to be matched. However, analyzing and establishing fair loan configurations, especially in the volatile crypto landscape, remained challenging.

Furthermore, legacy P2P models necessitated locking liquidity until specific custom terms are violated, prohibiting instant withdrawals. Crypto is a volatile industry and liquidity is often needed to cover other positions. The mandate of locked liquidity further added to the poor UX on these platforms.

Inadequate Liquidity: This poor UX hampered liquidity attraction, made it difficult for borrowers to secure loans and occasionally resulted in unfavorable configurations leading to lender losses. In addition, EthLend and Dharma over time struggled to compete with other platforms that offered more attractive incentives to liquidity providers, making it harder to attract and retain funds.

Pool-Based Models

Pool-based models like Aave and Compound were the first protocols in the race of Defi 2.0*.* Dramatically improving on the learnings of P2P models, Aave and Compound kicked off the next bull run in DeFi by offering significantly better user experiences. Although Aave and Compound are both some of the largest DeFi protocols to date, we argue that their risk approach and now three year old pool-based design have hampered them from innovating further and offering desired features to users.

Riskier Approach: Aave and Compound operate as cross-collateralized pools, meaning that the presence of bad debt associated with one asset can affect the entire protocol. As an analogy, imagine you wanted to deposit your money to earn interest from loans backed by high quality mortgages, but the bank forces you to accept that your money will also be used to back junk mortgages. This is exactly what happens right now on Aave and Compound. One wrong misstep and the protocol can be loaded with millions in bad debt. This has caused growth to stall and forces protocols to take months to years to list new assets as collateral. This has limited usage to the same 10 assets, mostly stablecoins and ETH, as collateral, preventing a myriad of financial opportunities.

Lenders must accept the entire set of collateral designated by the protocol or take their money elsewhere. To help remedy but not fix the problem of bad debt, Aave and compound have implemented strict asset restrictions with conservative risk parameters. As a further band aid fix to the protocol design, Aave introduced the concept of users staking Aave tokens for yield in a safety reserve, where in the case of a shortfall these tokens would be sold off to fund that shortfall. This is clearly a short term solution and not ideal in a long term sustainable money market protocol.

Not Ideal User Experience: Aave and Compound, provide significantly better user experiences than their P2P predecessor by aggregating liquidity and sharing risk among all depositors and assets. However, as touched on above, the implementation of strict asset restrictions goes against the ethos of “permissionless lending”. Users are not allowed to use any asset on a protocol and thus have to spread their assets across multiple crypto protocols. This fragmentation is a poor user experience that creates an additional overhead for users to manage their assets across multiple protocols and keep track of which assets are where.

Yield Considerations: Because of the pool-based design, interest rates for lenders in respect to the risk of the loan are not aligned. As an analogy, you should earn a higher interest rate as a lender if you’re giving a loan to a riskier individual. However, what if now the bank says it doesn’t matter and that you will earn the same interest from lending to both 500 (poor credit) and 800 credit score (great credit) individuals? This is what is happening right now in pool-based models! Depositors lose out on additional interest if their capital is lent against riskier collateral. As an example, borrowers using ETH as collateral only are forced to pay higher interest rates at the expense of the borrowers using CRV as collateral only.

Isolated Pool-Based Models

Some protocols have tried to improve the pool-based model by introducing isolated pools, like Beta, Euler, and Rari Fuse. While the isolated pool model solves the issue of supporting borrowing for risky assets, it falters elsewhere.

Poor User Experience: Isolated pools still fail to solve the challenge of allowing more collateral types without fragmentation. Protocols are still required to create a separate isolated pool for each collateral type configuration they wish to support, creating fragmentation and overhead for users. As as assets are not shared between isolated pools and isolated pairs this renders yield too low to be sustainable for the amount of risk taken.

Capital Inefficiency: Some protocols have sought to improve the P2P model through shared isolated pairs, like Sushi Kashi. Although this reduces the burden on users to configure loan terms, liquidity fragmentation persists. It shares the same issue as isolated pools, where new pairs must be created for each collateral set configuration, further complicating the user experience and hurting capital efficiency.

Omni: Lending 4.0

As you have seen, the previous iterations of lending protocols are all plagued by their own drawbacks. To remedy this we have created the Omni Protocol which introduces many novel mechanism designs for money market to improve the user experience and more.

A Better User Experience

Personalized Lending

Lending is now personalized to the risk appetite of lenders with. User can choose to lend and only accept specific collateral. The yield received by lenders is dynamic and additive. Let’s say you want to lend SHIB 🐶 (Shiba Inu) in addition to stablecoins and ETH as collateral. SHIB borrowers will pay higher interest rates than borrowers using stablecoins and you as a lender will be compensated by earning the base interest from users borrowing stablecoins + the higher yield from everyone using SHIB as collateral.

Because of this, you as a lender are provided these benefits:

  1. You don’t need to worry about losing out on yield when taking on greater risks, and you’ll be paid better interest rates.

  2. You don’t need to worry about putting your assets at risk when others in the same pool want to take more risk.

  3. You’re always fully in control.

Liquidity & Capital Efficiency

Zero fragmentation

Borrowers are now able to access the deepest liquidity for any respective collateral type. There is zero fragmentation for deposits available to a given collateral type, meaning borrowers get access to the maximum liquidity always. Omni is the only protocol that is able to cover any asset type for collateral and borrowing. Borrowers are provided different interest rates based on the risk grade of the collateral they use and the same borrowing options familiar to users are still available: cross, isolated, and high-efficiency modes.

As stated in the paper On the Inherent Fragility of DeFi Lending, "DeFi protocols struggle to achieve efficiency and stability while maintaining a high degree of decentralization.” Omni aims to improve upon the learnings brought by predecessors in the lending space to offer the best in class platform for users - both from an efficiency and decentralization aspect. We call it Lending 4.0.

When launch?

We are excited to have the Omni protocol go live on Sepolia this September 28th. We will be releasing details on how users can sign up for exclusive early access to the new product during the week of the product launch. To stay updated with the latest news on Omni, make sure to follow our socials on Twitter and join our Discord.




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