Sentiment v2 is a leveraged lending protocol, specialized for complex portfolio positions onchain. V2 iterates on v1 by bringing additional flexibility and extensibility of the core protocol without compromising security. Lending in DeFi is progressing, with the main focus being on externalizing risk management and simplifying the core system to make the protocol flexible. Sentiment v2 takes these concepts into consideration. Additionally, v2 optimizes for complex collateral and portfolio positions. Lenders benefit from adaptive risk management, while borrowers benefit from capital-efficient collateral management. Below we’ll take a high-level overview of the protocol from a product and user-oriented lens.

Features

Sentiment v2 improves upon many limitations of v1 namely; lack of adaptive risk management and high friction onboarding new collateral. Sentiment v2 solves these short-comings, with core features to the protocol:

• Adaptive risk management

  • Pools can be managed by 3rd parties, who can quickly adapt to market changes.

• Permissionless

  • New pools with different collateral types can be quickly and easily created.

• Isolated Pools

  • Pools only have exposure to specified collateral.

Given these features, we made several considerations of potential trade-offs: liquidity fragmentation and risk accounting.

• Liquidity Fragmentation → Super pools (more on this soon) are vaults built on top of lending pools that optimize liquidity distribution across lending pools.

• Risk → Risk engine manages accounting for borrower position, allowing for a single position to borrow from multiple markets.

Benefits for users

Lenders

• Lenders can earn passive yield with adaptive risk management. They could also manage risk on their own loans if they wish to.

Managers

• Managers can earn fees for managing risk and have flexibility with risk parameters.

Borrowers

• Borrowers benefit from a flexible margin system and capital-efficient collateralization across markets.

How we differ

Sentiment v2 will specialize in lending to complex portfolio types such as LP tokens of another DeFi protocol. The product is intended to have higher yields than money markets, since traders (borrowers) have greater flexibility with collateral types. Sentiment v2 differs from money markets or overcollateralized lending markets since borrowers can collateralize positions across different protocols and markets.

How liquidity pools work

Liquidity pools are erc4626 contracts that are managed lending pools. Managers’ have explicit ability to manage risk parameters such as LTV and liquidation thresholds on a liquidity pool. Managers ability to manage risk on lending pools are constrained as to mitigate malfeasance on behalf of lenders.

How risk is managed

Risk management happens at 2 levels in Sentiment v2. Initially, it happens at the base layer liquidity pool, where managers manage collateral-specific risks. Secondly risk happens at the aggregation layer for Super Pools, where vault creators aggregate a specific asset and distribute liquidity among liquidity pools within the core protocol.

Borrower Experience

Borrowing in v2 will differ from existing money markets since the debt assets are maintained within borrowers’ “positions”. Positions are contracts that maintain a user’s portfolio of assets, debt, and collateral, allowing for mutation of the position over its life cycle.

Borrowing flow

Borrowers are able to interact with any liquidity pool that accepts their assets as collateral. Given the permissionless nature, proliferation of pools and fragmentation of liquidity is expected. To remediate these issues, borrowers’ debt will be dynamically routed to give the lowest cost and lowest risk capital to borrowers. In addition to this, a debt position can be distributed over many pools using collateral that is globally accepted by the pools, adding capital efficiency for both lenders and borrowers.

Wen launch

Sentiment v2 is slated for spring 2024, until then we will continue to provide updates and insights gained ahead of launch. We have some exciting news on the horizon. Stay tuned!