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CryptoEconomic Research

Silo Protocol: A Non-Custodial Lending Protocol for Permissionless Money Markets

Silo will allow for anyone to create a secure and efficient money market in a permissionless manner for all crypto-assets.
by James ChungApril 22, 2022
DeFi Silo Protocol


Several risky lending protocols have been exploited as a result of their flawed design.  Cream Finance is an example that lost millions of dollars as a result of multiple flashloan attacks.  The attack was due to the fact that when a “shared pool” lending protocol whitelists a token for collateral the entire protocol is exposed to the risk of the token.  This is what happened with Cream Finance when they whitelisted the illiquid asset $FTT, a long tail asset, making the protocol less credit-worthy.   Over 40% of Cream’s collateral was a single CEX token ($FTT) which represented 25% of the token’s float!  Supporting tokens with low liquidity as collateral exposed Cream to significant insolvency risk.  More mature lending protocols such as Aave and Compound have mitigated these risks through governance policies that allow only a small number of tokens to be utilized. Unfortunately these policies still don’t completely resolve the systemic risks exposed by their flaw design.  Therefore, Silo Finance is taking on the challenge to redesign its lending protocol from bottoms-up that offers a more secure, efficient, scalable and permissionless money markets protocol.


Unlike some of the “shared pool” lending protocols today (e.g. Aave) where they are as secure and strong as their weakest collateral, Silo is aiming to be an “isolated markets” lending protocol that supports two assets; one composed of the bridge asset and the other a unique token. 

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As an example, let’s say you deposit $SNX in Aave and someone else borrows that $SNX with $UNI as collateral.  If something were to happen to $UNI, both the $SNX depositor and everyone else who deposited any token in the protocol would be exposed to the systemic risk.  However, on Silo you have one market for an asset that is paired with the bridge token (e.g. ETH). So on Silo, you would deposit $SNX in SNX-ETH market while someone else would deposit $UNI in UNI-ETH market and borrows your $SNX. Essentially, your $SNX deposit would be protected with $ETH, not $UNI.  Similarly, $UNI would be protected by $ETH if $UNI went bad.  The bridge asset (e.g. ETH) serves to connect all Silo’s in the protocol.  In order to put up collateral and borrow an asset, both parties must have the same bridge asset (e.g. ETH), allowing both the long and short exposure of the unique token to exist.  Through this design, anyone will be able to lend and use any token as borrowed collateral in the same way Uniswap brought liquidity pools to tokens.

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Silo differentiates itself from other lending protocols in three ways:

1-Secure: Impact of an exploit is contained within the market (single pools) and not the protocol

2-Efficient: Delivers concentrated liquidity a result of each market supporting only 2 assets 

3-Scalable:  Any tokens available today can theoretically have a lending market since risk is isolated at market level and not protocol level

Money Market Landscape (Competitors Comparison)

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Source: Nansen Alpha

As part of Mainnet release, Silo plans to launch its lending application in two phases.  Phase 1, which started in February, was the 60 days guarded beta phase where the protocol focused on launching several Silo’s with capped TVL, testing, user experience, security audit review and preparing for growth. Phase 2, which is primarily focused on growth strategies, should have started this month (April). Unfortunately, it has been delayed due to delays from their auditors. They will be looking into options to stay course and finalize their audit on time.

Tokenomics and Mechanism Design

$SILO is the native governance token which will allow holders to impact protocol assets and functions through voting and delegation rights.  The SiloDAO will accrue value through several mechanisms including borrowing premiums, liquidation fees, SiloDollar Bribes (stablecoins can bribe to be included in SiloDollar basket) and SiloDollar redemption fees.

As referenced above, Silo will be launching a stablecoin which will serve as a bridge alongside ETH.  The stablecoin will be represented by a basket of other stablecoins and deposited into a AMM pool.  Depositors will be able to use its LP claim token to mint SiloDollars which will have a 85bps redemption fee accrued to its DAO.

$SILO has a fixed supply of 1 billion $SILO tokens which will be minted over the course of four years starting December 1, 2021 with possible inflation. Below is an overview on how the tokens are allocated along with the release schedule.

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Macro View

According to DeFi Llama, top lending and borrowing protocols are concentrated amongst Anchor, Aave and Compound which represent 70% of total value locked (TVL) across different chains. As mentioned earlier, these top protocols pose systemic risk to the protocol and its sector. Therefore, if Silo is able to successfully execute in addressing these concerns, the protocol will likely take away market share as it can potentially caused large sums of money to be lost. Said in another way, minimizing systemic risk would bring real value to the community.  In addition, the protocol is well positioned for having stablecoins of all risk types to build out liquidity with isolated risks for the depositors. This should bring more traction to stablecoins of all different risk preferences and possibly make SiloDollar the most borrowed stablecoin.

On the flipside, the tokens holder chart shows a high percentage of concentration in just several addresses (VC firm Arca has publicly revealed they are one of the largest token holders).  This raises the risk that a small number of large token holders can influence the protocol for their own gain.

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The team is strong and works with some of the greatest thought leaders in DeFi, including Joey Santoro from Fei protocol, Sam Kazemian from Frax and Tyler Ward from BarnBridge.  Notably, the project also originated from ETHGlobal 2021 hackathon as a finalist. It will be worth monitoring Silos progress as they push forward in launching their application this year.

Further Reading and Sources

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