At its core, Zeru's money market app features leveraged borrowing based on the zScore. zScore is the first decentralized reputation system for crypto that factors in onchain transactions, and offchain credentials through zkTLS to determine the reputation of a user based on their behavior. This makes it the first money market to function on the back of user's reputation.

The Carnot Cycle

Let us explain the Carnot cycle in a simple way:

Imagine you have a hot cup of coffee and the cold air in your room. The Carnot cycle is like a perfect machine that uses this temperature difference to do work, like spinning a wheel.

It works in four steps, kind of like a dance:

1. The machine touches the hot coffee and expands (gets bigger), absorbing heat - like a balloon getting bigger when it's warm

2. It continues expanding but doesn't touch either the hot coffee or cold air

3. The machine touches the cold air and shrinks (gets smaller), letting go of some heat

4. It keeps shrinking but doesn't touch anything

Then the cycle repeats. Each time this cycle happens, it converts some of the heat difference between the hot coffee and cold air into useful work.

The cool thing about the Carnot cycle is that it shows us the absolute best possible way to convert heat into work - like getting the maximum possible energy from the temperature difference between hot and cold things. No real machine can ever be better than what the Carnot cycle says is possible!

Carnot Cycle in DeFi

Applying the Carnot cycle directly to decentralized finance (DeFi) strategies is an unconventional concept, as they belong to very different domains - thermodynamics and finance. However, we can draw some metaphors to illustrate DeFi concepts using the Carnot cycle as an analogy. Let's explore this creative comparison:

Here's how Zeru applies the Carnot cycle to DeFi strategies:

1. Isothermal Expansion (Lending):

   • In the Carnot cycle: Gas expands at constant temperature, absorbing heat.

   • In DeFi: Funds from a liquidity pool (hot reservoir) are lent out, generating interest (absorbing value).

2. Adiabatic Expansion (Reinvestment):

   • In the Carnot cycle: Gas expands without heat exchange, temperature drops.

   • In DeFi: Earned interest is reinvested into different yield-generating protocols, diversifying but potentially increasing volatility.

3. Isothermal Compression (Borrowing):

   • In the Carnot cycle: Gas is compressed at constant temperature, releasing heat.

   • In DeFi: Borrowed assets (often stablecoins) are obtained, releasing value for further investment.

4. Adiabatic Compression (Risk Management):

   • In the Carnot cycle: Gas is compressed without heat exchange, temperature rises.

   • In DeFi: Risk is managed by moving some assets back to less volatile positions, increasing overall stability.

The efficiency of this DeFi Carnot cycle can be measured by the net yield generated compared to the total value locked (TVL) in the strategy, similar to how the efficiency of a heat engine is measured by work output compared to heat input.

In summary, these are the key parallels:

• Hot Reservoir: Liquidity pools or high-yield opportunities

• Cold Reservoir: Stablecoin reserves or low-risk assets

• Work Output: Net yield generated

• Cycle Efficiency: Return on investment relative to risk

This provides a structured way to think about DeFi strategies in terms of energy (value) flow, efficiency, and cyclical processes. It outlines the importance of balancing high-yield opportunities with risk management and the cyclic nature of reinvesting gains.

zScore + Carnot = More Yield for All

Essentially, Zeru Finance is building a protocol that uses smart leveraging strategies to maximize returns in DeFi money markets, similar to how the Carnot cycle maximizes the efficiency of a heat engine.

In DeFi, sophisticated users often engage in "looping" - borrowing assets, using them to earn yield, and reinvesting the profits. It's like a cycle where each rotation should generate returns. However, this is usually limited by high collateral requirements and inefficiencies.

Zeru is supercharging this process by:

1. Reducing or removing collateral requirements, depending on one’s zScore

2. Optimizing the borrowing-reinvesting cycle

3. Using leverage (borrowed funds) strategically to amplify returns

4. Creating a more efficient cycle of money flow between lending and borrowing

Think of it like a well-tuned engine that aims to extract the maximum possible value from each cycle of lending, borrowing, and reinvesting - similar to how a Carnot cycle/engine extracts the maximum possible work from each cycle of heating and cooling.

The key innovation will make the looping process more efficient and accessible by removing traditional collateral barriers while managing the associated risks. With more users able to use leverage from day one, at reduced collateralization (or zero collateralization), lending platforms can drastically increase their loan-to-value (LTV) ratio, increasing the amount of assets that can be put to work rather than sitting idle.

In part, this is possible thanks to zScore, Zeru’s onchain credit score and infrastructure that analyzes users’ onchain behaviour. By examining past borrowing and repayment behavior, the model generates a credit score reflecting the probability of the user getting liquidated. A high zScore indicates a low risk of liquidation, making the user a more attractive borrower, and therefore they might be eligible for preferred under-collateralized or zero-collateralized loans. A low zScore indicates the opposite, and therefore that user will continue to take out overcollateralized or fully/partially collateralized loans until they prove their creditworthiness.

As users borrow capital, either through collateralized or under-collateralized loans, deploy it, and then repay the loans through Zeru, they earn Credit Tokens. Credit Tokens represent the value of zero-collateral loans they can take. As they increase that amount, they begin to free themselves from collateralized loans and will increase their zScore in the meantime. zScore is a SoulBound Token, therefore it cannot be transferred to another wallet or burnt.

This creates a cycle where people are incentivized to be good DeFi users, and break free of the shackles of overcollateralized loans that has burdened this industry for too long already.

DeFi Carnot Cycle in Action

You can see this Carnot cycle of DeFi in action now on Zeru’s incentivized testnet, running on both Berachain bArtio and Base Sepolia! Join now to earn Zubbles, see Zeru’s protocol in action, and get ready for rewards and mainnet launch coming later this quarter.

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