While billions of dollars are sitting in low-reward ETH positions and yield farmers lack borrowing opportunities for their yield-bearing tokens, Solace aims to unlock the potential of derivatives lending markets by leveraging protocols like Ajna, Pendle, and other DeFi platforms. This will empower the DeFi space with advanced yield and risk management strategies.
The graph illustrating the dynamics of underwriting capital accurately represents the current state of the DeFi insurance sector. It raises questions about the challenges faced by the sector and the shortcomings of existing insurance protocols.
Over the past years, the Solace team has relentlessly explored various hypotheses to tackle the scalability challenges in DeFi insurance (to learn more, read our previous blogpost "Solace: Journey to v2”). During our journey, we have identified several key problems that hinder the launch of successful insurance products and the overall scalability of the industry:
Underwriting returns cannot compete with other opportunities, particularly considering the additional risks involved in the process.
Implementing increased leverage as a solution to attract underwriting capital in DeFi requires intelligence, data, and risk diversification strategies that are currently unavailable in the ecosystem.
Discretionary decisions on claims Introduce subjective biases and lack transparency, undermining the trust and reliability of the system.
Builders often prioritize complexity over problem-solving. However, a successful solution must be lightweight, powerful, and able to scale quickly to mitigate market risks.
To summarize from the standpoint of DeFi investors, the prospect of underwriting risks for low yields (~2% APY) holds no appeal. Their primary focus is on obtaining reliable and efficient protection that facilitates a streamlined payout process without the need for extensive proof. Moreover, they place great emphasis on avoiding dependence on centralized entities with limited information.
Through relentless building, testing and iterating our journey has led us in a surprising yet remarkable direction. This path not only addresses the challenges at hand but also goes beyond being a conventional insurance protocol, enabling us to create something more.
We found that lending architecture suites greatly to establish underwriter-coverholder relationships through other use case and resolve concerns listed above. At the moment, there are no lending markets for derivative tokens as it is too risky for lending protocols that have traditional architecture and different goals. Using derivative tokens as collateral increases the risk of bad debt and exposes lenders to the underlying risks associated with third-party protocols. We need a completely new, flexible and permissionless lending architecture to make things work in the right way and that’s why we build on top of Ajna protocol.
Solace Derivative Markets Accelerator is basically veTokenomics above specific Ajna’s lending pools. We want the community to attract and control liquidity across lending pools of yield-bearing tokens in order to make available new enhanced DeFi strategies such as ETH Boosted Reward, Yield Arbitrage or Hedge against DeFi risks (virtually coverage). Thus, lenders will generate boosted returns and yield-bearing token holders will be able to borrow against their tokens.
💡 Why Ajna? Ajna operates with no oracles, so almost anything in a user’s wallet can serve as collateral and oracle-based exploits cannot affect a user’s positions. It's also completely permissionless, eliminating the need for governance to approve specific assets as collateral or parameters of the pool.
When liquidity is available for yield-bearing tokens, new opportunities and benefits arise. Let’s outline 3 key benefits of what Solace is about to bring up.
Access to leverage yield-bearing tokens. A lending market for derivative tokens opens up a way to utilize hundreds of millions of dollars that are sitting quietly in yield-bearing tokens right now. Some users are fine with it and others receive a tool to act in different way and earn more. A user who’s providing ETH to the Yearn vault could multiply the reward by borrowing more ETH against their position.
Boosted rewards for ETH providers. ETH along with stablecoins and BTC is one of the most popular and relatively safe assets in the crypto space. In other words, most of the yield opportunities for ETH have pretty low APY that can’t satisfy liquidity providers and makes them look for new strategies. A user can provide ETH to one of the listed lending markets on Ajna and stake the position’s NFT on Solace. This way an ETH provider will earn both lending pool fees and Solace rewards set by veSGT holders on a weekly basis (similar to Balancer model).
Access to risk management. Instead of dealing with insurance and all the cons that come with it, a user can borrow ETH against their yield-bearing tokens and virtually hedge against DeFi risks. Borrowed ETH goes for a claim payout in advance. The difference between yield APY and borrow rate is the price set by the market.
At the launch there will be available lending markets for the following pairs:
PT stETH / ETH
PT sfrxETH / ETH
PT ankrETH-WETH / ETH
PT StaFirETH-WETH / ETH
PT swETH-bbaWETH / ETH
PT rETH-WETH / ETH
Yield Arbitrage If Pendle offers a fixed 5% APY on PT-stETH (or 10% yvWETH), while the borrow rate for ETH on lending market is only 3%, users can deposit PT-stETH as collateral, borrow ETH, swap the borrowed ETH for more PT-stETH, and repeat it multiple times, potentially earning a maximum leveraged APY.
Hedge against DeFi risks (Coverage)
A user holding yvWETH or other yield-bearing tokens can hedge their position by borrowing ETH against yvWETH on Ajna's lending pool. The user can then either enter another yield strategy with the borrowed ETH or simply keep it.
If Yearn is exploited and yvWETH loses its value, the user keeps the borrowed ETH, virtually as an advance claim payout.
To effectively double their ETH rewards, a user should provide their ETH to one of the supported pools on Ajna that are specifically listed on Solace. By doing so, they can significantly increase their reward rate from 3% to an impressive 6%. Once the ETH is deposited, the user should stake the corresponding pool token on Solace to start earning additional rewards in SGT tokens. Users can further amplify their rewards by considering the option to lock their SGT tokens. This not only boosts rewards even more but also grants users control over SGT emission across various markets.
Testnet launch is planned for July 31 while the Mainnet launch is expected in Q3’23. Follow Solace’s Twitter and join the discord server to stay updated and participate in activities for early users.
Discord: Invite link
If you represent a DeFi protocol and you are interested in yield-bearing token listing, contact Solace DAO representatives via Discord or email (email@example.com).