All you need to know about Solend（SLND）

Introduction

DeFi lending protocols serve as the foundational infrastructure of the DeFi financial system and are essential for building decentralized ecosystems. Currently, most lending protocols in the market operate on a floating interest rate basis, where the deposit interest rate is based on the borrowing interest rate. As the borrowing amount in the asset pool increases, the borrowing interest rate rises, which suppresses the demand for borrowing in the market. Conversely, the deposit interest rate also increases, encouraging users to lend their assets and maintain liquidity in the pool.

Looking at the current lending protocols in the market, the business models have generally matured. Ethereum, with its longer time spent cultivating the ecosystem, has laid a solid foundation for product iteration and upgrades. Other public chains are just emerging, and to rapidly develop their ecosystems, the fastest and safest method is to directly replicate mature protocols from Ethereum and attract users through high liquidity mining rewards. Therefore, the difference between lending products on different chains lies more in the competition for liquidity. Solana’s DeFi ecosystem mainly covers DEX, lending, NFT minting, staking, and liquidity mining. Among them, DEX platforms have the largest TVL and dominate the DeFi applications on Solana. The share of the lending sector has gradually increased since October 2021, and Solend, as one of the native lending protocols in the Solana ecosystem, has performed well. This article provides a detailed analysis of its interest rate model, liquidation mechanism, token model, and development status.

Source: https://www.footprint.network/topic/Chain/Solana

What is Solend?

Solend is a native lending protocol in the Solana ecosystem that allows users to earn returns on their idle assets and borrow other assets by collateralizing their assets to increase leverage and improve capital efficiency. The project officially launched in August 2021 and conducted liquidity mining activities in October of the same year, resulting in continuous growth of the liquidity pool. The protocol faced an oracle attack in November 2022, resulting in $1.26 million in bad debt. To mitigate the risk, the team temporarily disabled the liquidity pool and released the v2 version whitepaper in March 2023. Solend v2 was officially launched in April of the same year.

The team behind Solend remains anonymous. They raised $6.5 million in a seed funding round in October 2021, with investment from Polychain, Dragonfly, Race, Coinbase Ventures, Solana Ventures, and others. In November of the same year, they raised over $26 million in an initial DEX offering (IDO), demonstrating a certain level of financial strength.

Interest Rate Model

Solend is also a floating interest rate lending protocol that uses a pool-based model for overcollateralized lending. The protocol positions itself as Solana’s autonomous interest rate machine and has a relatively simple business logic with banking-like features, which revolve around depositing, borrowing, withdrawing, and repaying. Depositors earn interest by depositing funds into the pool and can withdraw them at any time. Borrowers obtain funds from the pool through over-collateralization and can repay them at any time. If a borrower’s collateral is insufficient to support their debt, their account will be subject to liquidation.

The protocol’s lending products primarily determine borrowing and lending interest rates through parameters and mathematical algorithms. Each pool has specific parameter designs and the borrowing interest rate is calculated using a piecewise function. In the process of determining the borrowing interest rate, an important parameter known as Utilization is considered. Utilization refers to the ratio of the value of borrowed assets to the total value of assets deposited in the lending pool. In Solend’s algorithm design, the borrowing interest rate is a piecewise function of utilization. Overall, the borrowing interest rate is directly proportional to utilization, meaning that as utilization increases, the cost of borrowing for users also increases, and as utilization decreases, the cost of borrowing for users decreases. The detailed formula for the segmented function is as follows:

Source: https://docs.solend.fi/protocol/fees

The design of deposit interest rates is based on borrowing interest rates, as depositors can earn interest from borrowers. The interest is divided within the entire pool, so the deposit interest rate is calculated as the borrowing interest rate multiplied by the utilization rate. For example, if two depositors provide 1 BTC each in a pool, and a borrower borrows 1 BTC at an annual interest rate of 20%, each depositor will receive a 10% annual interest rate on their BTC. The team has set different parameters for each asset, which determine the deposit interest rates for users at different times. The deposit interface of the protocol displays the annual compounding interest for each asset. Additionally, users who deposit SLND, UST, stSOL, and mSOL can participate in liquidity mining rewards, which are distributed on the 3rd of each month.

In addition to paying borrowing interest, users also need to pay a protocol fee when borrowing. The protocol fee consists of a host fee and a program fee, with the program fee being deposited into the Solend insurance fund. The protocol has designed protocol fees for each pool, with a total protocol fee of 10 bips (0.1%). It is allocated in an 8:2 ratio between the host fee and program fee, so the host fee is typically 8 bips (0.08%), and the program fee is 2 bips (0.02%).

Liquidation Mechanism

Solend uses the primary oracle Pyth and the backup oracle Switchboard to calculate the account’s current health factor based on the deposit and borrowing balances. If a user’s health factor reaches the liquidation threshold, the user will be liquidated. The liquidation threshold is determined by parameters set for each token, and the protocol adjusts this threshold based on the weighted average of all assets deposited by the user.

When an account undergoes liquidation, a third-party liquidator of the protocol will sell an equivalent amount of collateral in the account to repay 20% of the borrower’s loan. Additionally, the liquidator will receive an extra 5% of the remaining loan amount as a liquidation reward.

For example, if Bob deposits $10,000 USDC into the liquidity pool and borrows $7,500 worth of BTC, assuming the BTC price increases by 20%, resulting in the account’s BTC value reaching $9,000 (75001.2) in USD, Alice’s account will be liquidated. (1) First, the third-party liquidator will extract the amount of USDC collateral from the account to repay 20% of the BTC loan, which is $1,800 (9,0000.2) in USD. (2) Then, the liquidator will receive 5% of the remaining repayment amount as a liquidation reward, which is ($9,000-$1,800)*0.05=$360. (3) Now, Bob’s deposit amount is $10,000-($1,800+$360)=$7,840 USDC, and the loan amount is $9,000-$1,800=$7,200 BTC.

Tokenomic Model

Solend’s native token is SLND, with a fixed total supply of 100 million tokens. The team announced the token allocation plan on October 27, 2021, with 60% of the tokens allocated to the community, 25% to the core team, and the remaining 10% to investors.

Within the 60% of tokens allocated to the community, half (30%) will be used for liquidity mining programs, while the other half will be allocated to the treasury managed by SolendDAO. Additionally, the 5% of tokens allocated during the initial DEX offering (IDO) also come from the treasury.

The 15% of tokens allocated to investors are divided into two parts, with 10% allocated in the seed round and an additional 5% reserved for future strategic funding rounds. The 10% SLND tokens allocated to seed round investors have a three-year unlocking schedule, with the first unlock scheduled for October 1, 2022, followed by monthly linear unlocks for the remaining duration.

The 25% of tokens allocated to the core team also have a three-year unlocking schedule, with the first unlock expected on June 1, 2022, or possibly at a later date.。

Source: https://docs.solend.fi/DAOToken/token

The team launched an Initial DEX Offering (IDO) in October 2021, with a total of 5 million SLND tokens reserved for the IDO, accounting for 5% of the total token supply. Out of the 5 million tokens, 4 million were allocated for the IDO distribution itself, and 1 million were allocated for liquidity providers of the SLND/USDC trading pair after the IDO. The IDO raised over $26 million, with SLND trading at approximately 6.5 USDC. The funds raised were managed by SolendDAO for community governance and to mitigate potential market black swan events.

Liquidity Mining

Solend has announced two liquidity mining programs. The first program was launched in October 2021, where users could earn SLND token rewards by providing or borrowing assets such as SOL, USDC, and ETH. The release rate of SLND tokens for liquidity mining was 0.1585 per 500 milliseconds. The released tokens were distributed evenly between the deposit pool and the borrowing pool, according to the weights assigned to each market. For example, if the total weight of all markets is 28 and a particular asset’s borrowing has a weight of 6, the borrower would receive a monthly SLND reward equivalent to 6/28 of the total SLND tokens released. For more details on the reward program, refer to the official documentation.

Starting from July 1, 2022, Solend officially launched its Liquidity Mining 2.0 program, distributing liquidity mining rewards in the form of bullish PsyOptions. This option is an American option with a one-month term, allowing holders to exercise it at any time. The exercise price is set at 30% of the SLND price at the end of the term, and users must exercise the option to claim SLND rewards. The use of bullish options provides consistent incentives for both holders and LPs, as holders can only profit when the token price is above the exercise price.

Development Status

After its official launch in August 2021, Solend’s liquidity pool size soared under the incentives of liquidity mining and IDO activities, reaching a peak of over $900 million and becoming one of the largest lending protocols on Solana.

However, in 2022, the protocol faced community governance disputes and was further affected by the Crema Finance hack, which was attributed to the depletion of Solend’s flash loan liquidity pool. The team immediately transferred $25 million of USDC debt to Mango Market and designated a long-term plan with the Mango team. These negative events resulted in a significant decrease in Solend’s liquidity and user funds flow. With the recovery of the Solana ecosystem in the second half of 2023 and the release of Solend v2, the total locked value in the liquidity pool currently stands at approximately $160 million.

Source: https://defillama.com/protocol/solend

Conclusion

The Solend protocol establishes pool parameters and piecewise functions to determine borrowing and lending rates. Users can earn returns on their idle assets by depositing them and borrow other assets by collateralizing their assets to increase leverage and improve capital efficiency. The overall business logic follows the framework of common lending products and is considered a relatively secure choice.

Solana, one of the emerging public blockchains, is experiencing positive development momentum and competing with Ethereum for liquidity. The ecosystem landscape is yet to be determined, and Solend is one of the major lending protocols on the Solana blockchain, with a certain level of financial scale. Its development relies on the progress of the underlying blockchain, Solana.