WTF is… Silo Finance

The landscape of DeFi has been plagued by large-scale hacks aimed at some of the biggest projects over the last two years. Additionally, some of the most effective exploits stem from price oracle-related vulnerabilities in borrow/lending protocols. This issue is only exacerbated as your favorite place to deposit your shitcoins for some extra interest actually holds all borrowable assets in one central pool, concentrating risk in a large amount of capital. In short, this means that if an attacker artificially inflates one listed collateral’s price = the whole pool can be borrowed against it, leaving depositors of ALL borrowable tokens out on their ass. Not only do shared deposit pools maximize the value to be extracted, they also give depositors no autonomy in choosing the risk profile of accepted collaterals. This is where Silo Finance becomes very interesting as a base layer application, as the project aims to isolate risk to specific lending pairs through their use of “Silos”, while also giving borrow liquidity to virtually any shitcoin pair. Let’s get into it 👇

Silos and Bridge Assets

The concept is simple; instead of having all borrowable tokens deposited into one shared pool, the Silo team came up with an elegant design to split each token into its own pool or “Silo”. This isolates risk to a single borrow pair, as opposed to compounding that risk across one huge pool of capital with multiple assets and accepted collaterals. Each token is paired with $ETH in their Silo, and $ETH acts as the “Bridge Asset”, which enables the whole system and allows for exotic borrow liquidity. What does a 🌉 asset do? I will show you.

Let’s check out an example → User has $USDC and wants to borrow $CVX, but there is no native lending market, and User doesn’t want to sell $USDC exposure just to borrow $CVX. Solution = User deposits $USDC into the $USDC/$ETH Silo and borrows $ETH against their $USDC, User “bridges” borrowed $ETH to the $CVX/$ETH Silo, User deposits “bridged” $ETH and borrows $CVX against it, User can now do whatever they want with that $CVX. Not only is User able to get $CVX borrow liquidity against their $USDC, but risk is also isolated to single pair pools (Silos) and not shared with any other borrowable assets (more on this later). It is important to note that you are opening up two positions with this strategy, an $ETH borrow against $USDC, and a $CVX borrow against $ETH, and you will have to monitor two LTV ratios!

Aside from isolating risk into specific borrowing pair pools, Silo provides a huge benefit in terms of weird borrow pair liquidity. This can be shown through the borrow accessibility of, let’s say, $SHIB/$LDO. There are no native money markets including that borrow pair, but since Silo Finance introduced the Bridge Asset, the protocol can quite easily facilitate that borrow as such → User deposits $SHIB into $SHIB/$ETH Silo and borrows $ETH against their $SHIB, User “bridges” borrowed $ETH to $LDO/$ETH Silo, User deposits “bridged” $ETH and borrows $LDO against it. This is the same flow as the example with $USDC/$CVX, but highlights that ANY collateral can be used to borrow any asset, given there is a Silo spun up for the desired asset. Now, instead of just going down 25 percent, u can get liqd on ur down torrential plays with ur friends in Discord!

s/o to @arcantrky on Twitter

Risk Assumption & Isolation

You might be asking yourself who assumes the loss if specific Silos are exploited, which is a good question. $ETH depositors will always assume the risk of loss of funds, whether it be a basic $ETH depositor or an $ETH bridger. Exploits leading to loss of funds will act as they do in a normal borrowing pool, yet will be capped at the $ETH liquidity of the pair being attacked, minimizing the overall damage, especially when compared to a shared pool system.

Let’s run through a quick example → An attacker convinces the oracle for the $BNT/$ETH Silo that $BNT is $100 USD instead of $1 USD. This gives the attacker the ability to borrow $ETH against $BNT at 100x the real value of the collateral, at which point the attacker can potentially borrow all of the $ETH liquidity in that Silo. This obviously means that both “bridged” $ETH and basic $ETH deposits in that Silo are not safu. $ETH depositors always assume risk.

Although $ETH depositors always take on the risk of loss in Silo, there is a huge unique benefit here = The protocol lets $ETH depositors have autonomy over the risk profile they assume, as opposed to having handfuls of collaterals whitelisted for a single pool via governance. Since every Silo is a single $shitcoin/$ETH pair, $ETH depositors can pick and choose which collateral type would be hardest to manipulate and deposit their $ETH there, without having to worry about any other collateral being used as an attack vector.

There will always be tradeoffs between riskier pools and higher interest rates, as Silo interest rates will be determined by a dynamic rate model driven by utilization. Silos with high-risk isolated token pairs will generally have less $ETH borrow liquidity (because, duh, they are riskier), driving the utilization rate up if there is borrow demand, which in turn drives the real interest rate up for $ETH deposits. This increase in rate may compensate for that extra risk for some users.

$SILO

This may be the most controversial piece of this article. The $SILO token auction was meant to target the early community, yet it gained the attention of a few larger wallets who were able to buy a large portion of the supply, creating somewhat of a distribution issue that has yet to be resolved. It may be smart to track the largest holders’ activities if you want to look for an attractive entry point and is definitely a point of consideration. Supply distribution aside, the team is trying to find innovative ways to drive value to their token and assign it an important role in the ecosystem. As we all know, getting the token flywheel started in DeFi is essential for the sustained success of a project in the long term. Silo’s vision to do so is to have borrowers in abundance, as they drive the APY for depositors, creating a healthy relationship between the two. The initial thought is to provide inflationary token rewards for borrowers in their isolated pools to help sustain the real interest rates for $ETH depositors. The team has not decided on a set model and is listening to community feedback before landing on one. Once this gets going, it will be interesting to see which crazy borrow pairs degens start to ape

Diminishing Risk = Expanding Userbase

We have long needed to find alternative ways of making DeFi more usable for everyone(we need exit liq ofc), and Silo is taking a huge step in the right direction. We will never be able to make exploits impossible, but isolating risk into specific pairs and away from huge pools of capital can drastically reduce the effect of a single attack. If Silo is used as a base layer for others to build on top of, maybe we can avoid the 100m+ USD exploits on lending protocols, and massively scale down the surface area on which exploiters can use to extract value. Additionally, to further legitimize DeFi as a sector, it is imperative we give autonomy to users and, eventually, institutions to define their own risk profiles, which is exactly what Silo is trying to do. Audits are underway, but auditing new primitives are always tricky and time-consuming. However, the protocol should be launching soon™️.

As always, if you want to reach me, feel free to hit me up on Twitter @thiccfarmer.

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Disclaimer: Members within Yunt Capital DAO may hold the $SILO token and any other token mentioned in this article.

As always, please do your own research. This is not financial advice. Every strategy is not for everyone. Each investor needs to understand what is right for them.

Thicc is a brawny and voluptuous male farmer, who spends his days tending to his crops and livestock while also turning heads with his impressive physique. Despite his imposing figure, Thicc has a gentle heart and is always ready to lend a helping hand to those in need.