The Optimist - Silo Finance

In this Optimist’s Twitter Spaces which took place on July 10, 2024, Charlie hosted Tenzent from Silo Finance to discuss isolated lending markets, risk management, innovative interest rate models, and more! Read our notes below to learn more.

Background

Charlie (Host) – Co-Leader at The Optimist

Tenzent (Guest) – Business Development at Silo Finance

Silo Finance – an Isolated lending markets protocol on Ethereum, Arbitrum, and Optimism

Exploring Isolated Lending Markets: Tenzent from Silo Finance

Tenzent explains that he entered crypto around 2017, engaging in Bitcoin arbitrage before joining a family office fund. He became involved in various DAOs and organizations, gaining expertise in the business side of crypto. Two years ago, Silo Finance offered him a position, and he has been thrilled with the team’s progress and professionalism.
Charles asks Tenzent to explain the difference between Silo’s isolated markets and the traditional pooled markets like those of Aave and Compound.
Tenzent outlines the key differences:
- Shared Pool Model: Traditional platforms like Aave and Compound use a shared pool model where all assets are treated the same and can be cross-borrowed. This model provides efficiency but also risks, as a bad asset can jeopardize the entire pool, even with risk caps in place.
- Isolated Markets: Silo Finance operates with isolated markets, meaning each asset has its own separate market. For example, the Wrapped Staked ETH market is entirely separate from the $ezETH market. This architecture ensures that if one asset market is compromised, the others remain unaffected. Each row in Silo’s interface represents a distinct market with its own assets and borrowing capabilities.
Tenzent highlights the robustness and security of Silo’s platform, noting its extensive audits, formal verification, and two years of battle-tested operation. He explains that Silo’s approach allows for greater flexibility and safety, as adding a new market (e.g., for a new asset like Pepe) does not impact existing markets.

Exploring Silo’s Isolated Market Approach and Its Advantages Over Shared Pool Models

Charles highlights the lack of connection between markets in Silo, highlighting its ability to safely support long-tail assets without risking bad debt across other markets. He points out that serious lenders can tailor their risk exposure more effectively with Silo compared to traditional shared pool models.
Tenzent explains another key feature of Silo: independent borrow rates for each market. For example, borrowing $ETH in the $ezETH market may have a different rate than in the Wrapped Staked $ETH market. This allows Silo to set interest rate curves that accurately reflect market conditions for specific assets, avoiding the issue seen in shared pool models where high borrowing rates for one asset can push out users of other assets.
Charles then asks about the historical popularity of shared pool models and any drawbacks to Silo’s isolated market approach.
Tenzent notes that shared pool models offer liquidity presence across all markets simultaneously, which can be advantageous. However, he argues that advanced market participants can create auto-rebalancing strategies in Silo to achieve similar efficiencies. The main drawback of Silo’s model is that liquidity isn’t inherently pooled, requiring participants to actively decide to engage with each market.
Charles asks about protected deposits in Silo. Tenzent explains that protected deposits allow users to disable borrowing on their deposits, forfeiting interest but safeguarding their collateral from being borrowed and potentially exposed to risk. This feature is particularly useful for large holders who don’t want their assets shorted or exposed in the market. It was instrumental in handling significant loans like Mitch’s $CRV loan.
Charles brings up the Mitch situation, where Silo’s design prevented bad debt accumulation during a market downturn. Mitch, from Curve, had borrowed against a massive stack of $CRV. When liquidations started, Silo’s isolated market structure ensured that bad debt didn’t spread across the protocol, unlike other platforms.
Charles asks for clarification on Silo’s nomenclature, particularly bridge assets and base assets. Tenzent explains that bridge assets ($ETH and $USDC) are universally trusted and paired with every market, while base assets can be any asset. For example, in the $ezETH market, $ezETH is the base asset paired with $ETH and $USDC as bridge assets. This concept applies across different networks, ensuring consistent and trusted asset pairing.

Silo’s Transition and Interest Rate Models: Insights on $XAI, Market Dynamics, and Incentives

Charles inquires about $XAI, Silo’s stablecoin, and its role in the protocol. Tenzent explains that Silo is slowly phasing out $XAI due to sustainability concerns in maintaining its liquidity and borrowing rates. Instead, Silo aims to collaborate more with other stablecoin providers like $DAI and Ethena, focusing on supporting external stablecoins rather than favoring their own.
Charles asks about the different interest rate models employed by Silo.
Tenzent elaborates that Silo uses various interest rate models to target optimal utilization and profitability for users. These models are adjusted based on market dynamics and the staking rates of specific assets.
For example, borrowing rates for $sfrxETH are set slightly below the staking rate to make it profitable for users to loop. He demonstrates how Silo’s dynamic interest rate model works, highlighting its adaptability in maintaining liquidity and profitable loops for users.
Tenzent adds that Silo’s team is developing a new interest rate model for their v2, which will include parameters to create different types of rates such as kink, double kink, dynamic, and fixed rates. He invites users to check out their documentation, Silopedia, for more detailed information on their interest rate models.
Charles asks about current market incentives and strategies on Optimism.
Tenzent mentions that all markets on Optimism, except Worldcoin, are incentivized. They have two incentive programs running: one from an Optimism grant with 250,000 $OP streaming over five to six months and the other from Superfest. He highlights the $ezETH market as particularly profitable due to generous deposit incentives from the Renzo team and additional rewards from Contango and Superfest. He recommends users take advantage of these incentives to create high yields.

Exploring Silo’s Tokenomics, Governance, and Market Expansion

Charles shifts focus to Silo’s governance and tokenomics, asking Tenzent to explain the role of the $SILO token and its future revamp. Tenzent reveals that Silo is working on a v2 tokenomics model where users can stake their $SILO for $veSILO. This staking mechanism will offer a boost on rewards, governance rights, and the potential for revenue sharing. He highlights the impressive revenue generation of Silo, highlighting the protocol’s financial health.
Discussing governance, Tenzent explains that Silo uses Snapshot for community voting and Tally for executing on-chain proposals. $SILO token holders control the treasury and can propose and vote on various protocol decisions. He encourages community participation, mentioning that even smaller opinions are considered for governance proposals.
Charles recaps the ongoing incentives for Silo users, mentioning the 250,000 $OP grant distributed across all markets and the additional rewards from Superfest. He points out that the $ezETH market, along with others like wrapped staked $ETH and $sfrxETH, are heavily incentivized, particularly for ETH deposits.
Charles inquires about Silo’s plans for bringing more markets to Optimism. Tenzent mentions the successful integration with Pendle and expresses the desire to port over more markets, including Pendle PT tokens, EtherFi $eETH, and Curve LP tokens. He explains that Silo can list derivatives and LP tokens without affecting other markets, allowing for greater flexibility and potential for high-yield opportunities.

Enhancing DeFi Lending: Silo’s Security-First Approach and Upcoming Innovations

Charles asks Tenzent about the possibility of using other DEX LP tokens like Balancer.
Tenzent explains that using Uniswap v2 LP tokens is risky due to the lack of secure oracles, making them highly manipulatable. However, Curve LP tokens have a different Oracle system that works, and Uniswap v3 positions are feasible. He mentions that full-range liquidity setups, like those in Uniswap v2, are very dangerous unless priced by an external oracle.
Charles asks about future plans for Optimism and other highlights.
Tenzent shares that more assets are coming to Optimism, and they are working with DIA Oracles to set up oracles for various assets, enhancing the diversity of assets available on Silo.
Charles asks about the timeline for v2 and its features.
Tenzent avoids giving a specific date to avoid pressure but shares that v2 is focused on improving the liquidation process and introducing liquidity hooks. These hooks allow for custom logic before and after transfers, enabling more efficient liquidity management. For example, idle liquidity can be placed in the DAI Savings Rate (DSR) to increase net yield. Liquidity hooks can also track staking rates, ensuring profitable borrowing and looping, which is particularly useful for institutional clients.
He mentions that v2 will also allow for permissionless listing and deployment of markets, enabling users to create their own markets with customized parameters. The update will include manager roles, fee splits, CCIP-enabled VE model, and more features detailed in upcoming blog posts.

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Show Information

Medium: Twitter (Audio)
Show: The Optimist Twitter Space
Show Title: Silo Finance – Risk Isolated Lending
Show Date: July 10, 2024