【Lender】Simplex Protocol: A New Approach to Yield for Lenders in DeFi

In a previous article, we talked about an idea of a no-liquidation lending protocol: https://scapital.medium.com/insightful-examination-of-the-no-liquidation-lending-protocol-f6923835988f

We also talked about what this no-liquidation lending protocl means to a borrower: https://medium.com/@scapital/borrower-simplex-protocol-a-new-era-of-borrowing-in-defi-147ea8a58702

Here, we will discuss what it means to a lender.

Introduction

In DeFi lending market, lenders are constantly looking for platforms that ensure stable returns, secure investments, and opportunities for asset growth.

• Stability: Lenders value consistent and predictable returns, particularly amidst the inherent volatility of the crypto market.
• Growth Potential: Beyond stability and security, lenders seek opportunities for asset growth and strategic investments, especially in a market known for its rapid evolution.
• Security: The safety of lenders invested capital is paramount. Careful designs other than innovative features are needed to protect the principal amount and minimize the risks.

With these priorities in mind, Simplex Protocol introduces three innovations:

• Fixed-term Stablecoin Pools
• Auto-Staking Rewards
• Preset-price Liquidation Mechanism

These features collectively improve lender yields, offer strategic investment opportunities, and ensure principal security, positioning Simplex as an innovative protocol in DeFi lending.

Stablecoin Pools Provided by Lenders

Central to the Simplex Protocol are stablecoin pools provided by lenders, which act as the primary sources of funds for loans, typically in stablecoins like USDC.

• Key Characteristics of Stablecoin Pools:
• Expiration Date: Ensures a clear timeline for loan repayment.
• Liquidation Price Limit: Provides risk clarity for lenders.
• Liquidity Provision: Lenders contribute stablecoins, powering lending operations and earning returns from staked collateral.
• Loan Repayment Flexibility: Offers borrowers the option for early repayment, affecting lenders’ liquidity based on the pool’s status.

Auto-Staking Rewards from Collateral ETH: the Continuous Source of Simplex Yield for Lenders

Collateral Conversion and Auto-Staking

In the Simplex Protocol, deposited collateral such as ETH is automatically converted into its staked equivalents (e.g., stETH). This process enables the collateral to earn staking rewards, creating a continuous and stable ETH-based income stream for lenders. The rewards generated from the converted collateral are pooled and distributed as yield to lenders. Unlike traditional platforms, Simplex Protocol’s focus on staking rewards as the primary income for lenders sets it apart, offering a stable and predictable ETH-based return. This not only secures the borrowed funds but also allows lenders to benefit from the ETH staking rewards over the loan term.

The Innate Natures of the Staking Yield as Return for Lenders

Yield Rate Estimation: The actual yield rate depends on the performance of the staking assets. For instance, a 4% annual return (R) from staked ETH would proportionally benefit lenders based on their pool share. Besides, other important variables that affect the return rate of lenders include

1. Utilization rate of both the lent-out USDC (U_usdc) in the lending stablecoin pool and
2. Collateral Rate of ETH (C_eth)

Now let’s run through the mathematical equations to have a solid proof of the dependence relations between these different variables of R , U_eth and U_usdc.

• Lenders’ Yield Rate (Y):

Y = R * (E_total * P_eth) / N_total

where R is the rate of auto-staking rewards, E_total is the total amount of ETH collateral in the pool, P_eth is the price of ETH, and N_total is the total amount of USDC in the pool contributed by lenders.

• Utilization Rate of USDC (U_usdc):

U_usdc = N_lent / N_total

where N_lent is the total USDC that has been lent out from the pool.

• the Collateral Rate of ETH:

C_eth = E_total * P_eth / N_lent

this measures the proportion of the pool’s ETH collateral that is effectively backing the lent-out USDC.

• Alternative Expression for Yield Rate:

E_total * P_eth / N_total = C_eth * U_usdc

then obviously we can have

Y = R * C_eth * U_usdc

this is equivalent to the initial formula for yield rate, showing the yield rate for lenders is as a function of the auto-staking rewards rate and the utilization rates of USDC and collateral rate of ETH in the pool.

These equations collectively provide a detailed mathematical framework for understanding the dynamics of yield and utilization rates within the Simplex Protocol’s lending system. Where we can safely conclude that as the relative ratio of U_eth / U_usdc increases, the yield will increase for the lenders and vice versa.

Last but not least, we want to emphasize that these calculations use fiat-denominated value for ETH just for the convenience of display. In the protocol, the ETH returns from auto-staking are transferred directly to the lenders contributing USDC.

Liquidation Opportunities for Lenders

Liquidation plays a crucial role in protecting lenders’ principal, ensuring timely collateral liquidation if its fiat value falls below the set threshold. Simplex Protocol equips its DeFi lending framework with the introduction of the “Preset Fiat Price Liquidation,” a feature designed to synergize with the protocol’s innovative lending. This mechanism plays a critical role in managing liquidations and offers substantial rewards for lenders, especially those eyeing ETH as a long-term investment better than holding fiat stablecoins.

Opportunity for Acquiring ETH at Favorable Rates

Lenders who contribute fiat(USDC or other stables) to the Stablecoin Poolscan directly participate in liquidation events. In these events, the mechanism is used to confisticate liquidated ETH collateral, at rates below the market value. For lenders focused on accumulating ETH, the Liquidation Pool presents a strategic opportunity. They can acquire ETH through liquidation events, potentially adding to their long-term holdings at advantageous prices.

Long-Term Investment Strategy

By acquiring ETH through the Liquidations, lenders align their investment strategy with the long-term growth of the Ethereum ecosystem. This approach is particularly appealing for those who are bullish on the future of ETH. The Liquidation Pool allows lenders to capitalize on market downturns by acquiring more ETH when prices are lower, turning potential market volatility into an investment opportunity.

The liquidations in Simplex Protocol offers unique and lucrative opportunities for lenders, especially for those who view ETH as a valuable long-term asset. Lenders can not only enhance their yield through diversified income streams of ETH returns but also strategically grow their ETH holdings, leveraging market fluctuation dynamics to their advantage.

Comparison of Return Opportunities for USDC Liquidity Provisions

Here are the comparison charts which provide a clear overview of the differences in income opportunities, risk management and fee beneficiaries among four major DeFi lending protocols: Simplex Protocol, AAVE, MakerDAO, and Liquity.

By comparison, we can find that by focusing on benefiting third-party lenders(USDC providers) and directly involving them in liquidations that give profitable benefits, Simplex Protocol effectively addresses the core need of its lending users — high return and income opportunities.

Conclusion

The Simplex Protocol marks a significant advancement in DeFi lending, particularly for lenders seeking stable, secure, and growth-oriented opportunities. Its unique approach, encompassing Preset-price Liquidation Mechanism, Fixed-term Stablecoin Pools and Auto-Staking Rewards, distinctly positions it in the DeFi space. By prioritizing lender needs and continuously innovating, Simplex Protocol not only stands as a testament to the evolution of DeFi lending but also promotes a potential way forward for the industry.

As the protocol evolves, its commitment to enhancing lender experience and adapting to emerging market trends will likely keep it at the forefront of DeFi innovation.

SCapital, a visionary crypto-native fund, is championing novel strategies in the DeFi landscape. Beyond mere investment, we actively partake in governance and advisory roles, ensuring continuous value growth.