LST Use Cases - Borrow-Lend

We have been exploring different DeFi applications for which LSTs can provide liquidity. Another great example are borrow-lend protocols. Money market borrow-lend protocols, such as Aave, Compound, and Curve, are decentralized platforms that facilitate the lending and borrowing of digital assets. These protocols enable users to earn interest on their crypto holdings by lending them out, or to borrow assets by providing collateral.

How Borrow-Lend Works

Borrow-lend protocols function by creating liquidity pools where users can deposit their assets. These deposited assets become part of a larger pool from which others can borrow. Lenders receive interest, while borrowers pay interest on the funds they borrow. The rates are typically determined algorithmically based on supply and demand dynamics within the protocol. For example, if there is high demand for borrowing a particular asset, the interest rate for that asset will increase, incentivizing more users to lend their holdings.

To borrow assets from borrow-lend protocols, users must provide collateral (usually other tokens). Borrow-lend in crypto must be overcollateralized — that is, the value of the collateral must exceed the value of the borrowed assets, ensuring the lender is protected against default. If the value of the collateral falls below a certain threshold, the protocol can automatically liquidate the collateral to repay the loan, protecting the liquidity of the pool. This process is governed by on-chain smart contracts and oracle price feeds, which execute these actions automatically and transparently based on predefined rules.

Borrow-lend protocols offer several advantages, including higher interest rates for lenders compared to traditional savings accounts and the ability to access liquidity without selling holdings for borrowers. Most importantly, however, borrow-lend protocols are permissionless. Just like how DEXs allow users to trade assets permissionlessly, with no intermediaries, borrow-lend protocols allow users to borrow money permissionlessly.

Borrow-Lend on Monad

Monad will surely have a robust defi ecosystem, of which borrow-lend protocols will be a large part. By focusing on EVM parallelization, Monad is designed with a focus on scalability and high transaction throughput, which are critical for the smooth operation of borrow-lend protocols. Historical EVM chains often struggle with congestion and slow transaction times, which can lead to inefficiencies and increased costs. Monad has already achieved 10k transactions per second and will ensure that borrowing and lending activities occur quickly and efficiently. This improved scalability helps support a larger user base and higher transaction volumes without compromising performance.

Gas fees are a significant concern for users of borrow-lend protocols. High gas fees can deter participation and reduce the overall utility of these platforms. Monad seeks to minimize transaction costs through parallelization and efficient use of network resources. By lowering the cost of transactions, Monad makes it more economical for users to engage in lending and borrowing activities at very large amounts, thereby encouraging broader adoption and higher liquidity within the platform.

Also, to operate efficiently, borrow-lend protocols also need deep liquidity across lending pairs. Just like with AMM DEX pairs, assets must be matched with a paired token that can provide deep liquidity to users wanting to borrow in and out of those assets. Kintsu LSTs are the perfect collateral for this borrowing and lending, as they hold the value of the gas token on the Monad network as well as bear the yield accrued from staking the gas token.

Kintsu is building the first liquid staking protocol for Monad. New borrow-lend protocols on Monad will be able to utilize sMONAD for deep liquidity across all tokens on the network. As new tokens are created, an abundance of sMONAD liquidity will allow for a great UX as users are able to borrow against sMONAD as collateral and also borrow sMONAD for other utilization throughout DeFi.

Conclusion

In conclusion, Kintsu’s liquid staking token (LST) — sMONAD, provides a foundational asset for Monad’s emerging borrow-lend ecosystem. The deep liquidity and collateralization potential of sMONAD will not only enhance user experience within DeFi protocols but also foster scalability and accessibility. With Monad’s focus on high transaction throughput and low fees, combined with Kintsu’s innovative LST solutions, we are poised to unlock new opportunities for borrowing, lending, and broader financial participation within the Monad network. Stay tuned as we continue to build a more efficient and dynamic DeFi landscape.

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