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· 6 min read
Nils Bundi

Welcome Vesu

Intro

The evolution of blockchain technology from its niche presence to a mainstream technology underscores a critical need: enhancing user experience (UX) to meet the standards of conventional digital platforms.

This requirement is even more pronounced in the decentralized finance (DeFi) sector, where current interfaces often present usability challenges and expose users to significant financial risks.

Vesu aims to offer a superior UX comparable to that of FinTech apps while leveraging the power of DeFi technology “under the hood”. To achieve this goal, Vesu has partnered with Argent, the leading Wallet on Starknet and Web3 UX champion.

Magic Meme

DeFi UX Challenges

The blockchain ecosystem traditionally demands a high degree of technical understanding from its users. Engaging with blockchain technologies involves navigating complex cryptographic processes and managing transparent yet intricate transactions, which can render DeFi apps practically unusable and deter novice users.

The following presents a (incomplete) list of key UX challenges in DeFi apps:

  • Self-custody requires users to securely store (and backup) their private keys in order to not lose access to their assets. This can be both a feature and a bug if users lack the appropriate tools e.g. for key recovery (hint to Web3 wallets).
  • Transaction fees pose a significant barrier to interact with DeFi apps. The fact that each interaction with an app can be very costly and has to be paid in a blockchain’s native token makes it currently impossible for DeFi to scale.
  • Token spend approvals are required for most interactions. Oftentimes DeFi apps require explicit approval transactions making the use less convenient and more expensive. Furthermore, unused approvals pose a significant security risk for users as evidenced by billions of USD hacked over the past years.
  • Transaction decoding, in Web3 wallets, is required for users to understand the result of a signed transaction. This poses a significant risk of "blind signing," where users approve transactions presented as indecipherable hashes and thus mislead users into approving unintended actions potentially leading to "wallet drains."
  • Wallet Compatibility: User deposits in DeFi apps are often tracked with internal positions. However, these positions are not represented using standard interfaces and thus are not compatible with Web3 wallets. As a result, wallets are not able to show a user’s positions across DeFi apps requiring users to connect to the individual apps.
  • Transparency on risks and fees is mostly insufficient, meaning that users are unable to make informed decisions. As a result, users are at risk of incurring unexpected losses or costs when interacting with a DeFi app.

Clearly, these challenges are not solved by a single player but require careful orchestration across different layers in the DeFi stack such as wallets, protocols and apps.

Argent Wallet has been a driving force in improving Web3 UX with innovations like “account abstraction,” “social recovery” and an early L2 roadmap.

Vesu too strives to be at the forefront of DeFi UX. Together with Argent we have therefore identified a number of UX principles that will benefit Vesu users with a seamless and secure lending experience.

Vesu UX Principles

1. Minimize gas fees

We built Vesu on Starknet because it offers the best “decentralization - security - scalability” (aka the blockchain trilemma) tradeoff. Starknet boasts the lowest transaction fees across L2s (see comparison below), and its roadmap offers a clear path towards unlocking more scaling improvements.

L2 Tx Fee Comparison Source: GrowThePie

This means that Vesu users don’t have to worry about spending more on transactions than earning on deposits.

2. Transaction Bundling

On Vesu multiple actions are always bundled in a single transaction using Starknet’s native multicall protocol. For example, token spend approvals are always bundled with the actual position action on Vesu.

Vesu Approval Revokes

With Starknet's native account abstraction and multicall features, this in fact results in minimal overhead and results in a seamless UX.

As a result, Vesu users are never required to sign, and pay for, multiple transactions even if an interaction requires multiple steps.

3. Revoke Spend Approvals

A key UX principle is automatically revoking unused token spend approvals when a user exits the app. Therefore, users are either asked to approve only a known amount of tokens spent, or an approval reset is appended to the transaction.

This proactive measure ensures that malicious bugs or attackers do not create openings for potential fund drainage, safeguarding users' assets more effectively than many other protocols.

4. Tokenized Deposits

Vesu pools, through the factory extension, issue a yield-bearing token, called the vToken, reflecting the deposited assets and the accumulated interest. This token implements the ERC4626 interfaces, a “tokenized vaults” standard that extends the ERC20 token standard and has found widespread use in the Ethereum ecosystem. Apart from the ERC20 transfer-related and metadata interfaces, this standard also enables convenience around wallet integration and overall UX improvements.

Vesu vToken

In order to unlock similar improvements and security across Starknet’s DeFi ecosystem we have created a Starknet Improvement Proposal (SNIP) which can be found here.

5. Transparency

Vesu values clarity and transparency in user interactions, especially regarding the critical aspects of risks, rewards, and fees associated with lending and borrowing activities.

This commitment is summarized by the following principles:

  • Show effective APYs and borrow cost, instead of current (irrelevant) numbers
  • Continuous risk assessment and mitigation (read more here)
  • Full fee transparency means Vesu users have visibility on all fees

Vesu APY Transparency

By presenting this information user-friendly and intuitively, Vesu ensures that users are fully informed and can make decisions with a clear understanding of potential outcomes.

6. Optimistic Position Updates

Vesu leverages optimistic position updates to enhance the UX and create a seamless user journey. This means that users see their position updates immediately, without waiting for the transaction to finalize on the blockchain.

This real-time feedback eliminates the latency typically associated with the underlying blockchain transactions. If a transaction fails, these updates are automatically reverted, ensuring the information users see is always accurate and up to date.

This innovative feature improves general usability, bringing Vesu one step closer to the looks and feels of a FinTech app.

Conclusion

The evolution of blockchain technology, particularly in the DeFi sector, demands an emphasis on user experience to drive wider adoption and improve security.

Vesu mitigates the complexities and risks traditionally associated with blockchain and DeFi interactions by leveraging Starknet’s low transaction fees and unique capabilities, and systematically bundling user transactions. This approach not only simplifies the onboarding and transaction processes for users but also establishes a new standard for transparency and user engagement in the DeFi landscape.

As the Starknet ecosystem continues to evolve, platforms like Vesu are crucial in bridging the gap between cutting-edge DeFi technology and the usability standards expected by everyday users.

· 8 min read
Nils Bundi

Welcome Vesu

Intro

Vesu democratizes access to financial infrastructure, enabling anyone to lend, borrow, and create new lending markets. This "free markets" approach places risk management squarely in the hands of users, underscoring the importance of transparency and informed decision-making. Technological vulnerabilities, counterparty risk, and market volatility are among the key concerns. Vesu thus equips users with a comprehensive Risk Framework creating a transparent and safe environment for lenders, borrowers alike.

This article delves into the intricacies of Vesu's Risk Framework and the methodologies employed to assess and communicate risks, empowering users to safely navigate this new open and permissionless world.

Main Idea Behind the Risk Framework

"There is no free lunch" is a key principle of finance hinting to the fact that financial opportunities generally come with a risk for investors. This also applies to DeFi and may even be amplified by the open and permissionless nature of these new markets.

N0 Free Lunch

Source: https://mises.org/mises-wire/why-there-no-free-lunch

The inherent risks within DeFi lending markets are multifaceted, encompassing smart contract vulnerabilities, dependencies on external price oracles, market volatility and liquidity issues, and counterparty concerns, among others. These elements underscore the pressing need for a comprehensive risk framework capable of addressing the unique characteristics of DeFi protocols. Such a framework would not only facilitate the accurate measurement of risk for a specific lending pool but also transparently and intuitively communicate these risks to users. In doing so, it could significantly improve user's decision making and diminish barriers to entry for new users.

A successful risk assessment methodology for lending markets must be adaptive, reflecting the highly dynamic essence of the sector. It should provide a structured approach to identifying and quantifying risks, incorporating both quantitative and qualitative analysis to offer a holistic view of the exposed risk levels within a lending pool. Moreover, this framework must evolve in tandem with the innovation of new lending models and the DeFi ecosystem itself, accommodating new risks as they arise.

Vesu’s risk framework is a step in that direction, offering a comprehensive methodology for evaluating and conveying the risks associated with depositing assets into a specific market, through an intuitive risk rating. This framework empowers lenders and borrowers to assess lending markets accurately, identify those that align with their risk profiles, and make informed decisions regarding their asset allocations. Developers can leverage the risk framework to make informed decisions when creating new lending markets or building extensions, ensuring the longevity and sustainability of the protocol.

Methodology

Our methodology builds on the general risk concept that suggests that risk = likelihood x impact. It focuses on a single risk impact metric: impact := "loss of funds". Risk assessment thus relates to the estimation of a risk event's likelihood.

Vesu Risk Framework

The risk methodology involves a continuous process resulting in a) identification of relevant risk events, b) risk rating, c) communication of risks, and d) mitigation measures.

a) Risk Identification

This step involves compiling a list of risk events related to a lending market and resulting in the aforementioned impact: "loss of user funds". Risk events can stem from the design, implementation, or configuration of a lending market or the respective asset and includes technical, economic, and counterparty risks.

The main risk events, or categories respectively, identified in Vesu’s model are:

  • Pool Risk: Pool risk includes the technical risks innate in smart contract code, including potential flaws in the framework or execution of the pool or its extension's logic. Additionally, counterparty risk in a pool can arise from central points of control within the pool's operational structure and the management procedures surrounding them.

  • Asset Risk: This event deals with the risks tied to the specific asset being deposited into a pool. It covers the potential for flaws within the smart contract, as well as depeg risk. Furthermore, counterparty risks are highlighted, stemming from centralized control points within the token's framework, its dependencies, and the governance mechanisms that oversee these aspects.

  • Oracle Risk: Decentralized lending mechanisms, such as Vesu's pool model, are susceptible to targeted economic attacks, particularly through price oracle manipulation. Malevolent actors may exploit the oracles by artificially inflating the prices of certain tokens. Such maneuvers involve the use of less liquid tokens to distort their value, subsequently leveraging this inflated valuation to maximize borrowings. This practice burdens the protocol with unsustainable debt, highlighting the critical need for robust security measures and vigilant monitoring of oracle activities to deter manipulation.

  • Market Risk: The DeFi sector is no stranger to the whims of market volatility, which poses a substantial risk to participants. Sharp declines in the value of collateral can precipitate situations where collateral ratios plummet to 100% or lower, triggering liquidation cascades. Similarly, market liquidity is another driver of market risk effectively defining a market's ability to absorb liquidations. If not properly accounted for, these factors can result in failed liquidations leading to bad debt and losses incurred by lenders in a market.

  • Collateral Risk: This parameter highlights how risks can transfer across different assets via a sequence of collateralized positions or collateral chains. Even if the primary asset appears secure, it might absorb the risks associated with the assets used as its collateral, or the collateral asset's collateral. Collateral chains thus serve as an important risk translation mechanism that can only be mitigated by isolating collateral from liquidity assets in a pool.

b) Risk Rating

Remember, risk = likelihood x impact. This step concerns allocating a risk rating to the identified risk events. This rating relies on estimating a risk event's likelihood, or how likely the event is to occur. For some risk events, the likelihood can be expressed as a statistical probability of occurrence within a given time period. However, in most cases, a qualitative approach is necessary due to a lack of data.

Our risk rating methodology uses a qualitative likelihood score consisting of four likelihood levels as shown in the table below.

LikelihoodDescription
Neutral ⬜Impossible for the risk event to occur
Low 🟩Risk event is unlikely to occur
Medium 🟨Risk event is unexpected but possible to occur
High 🟥Risk event is expected or unable to assess likelihood

Applied to each of the identified risk events, these scores result in a multidimensional Risk Scorecard providing full risk transparency on Vesu markets. We further aggregate these scores into a holistic rating reflecting the likelihood for any of the risk events to occur in a certain market. This holistic risk rating caputures the worst score across all events. Consequently, a Vesu market's overarching risk rating mirrors the worst-case risk across all events.

c) Risk Declaration

Risk declarations form the third step in our methodology. The objective of this step is to communicate risks in a transparent and intuitive way towards users and other stakeholders. For this purpose, the results of the risk assessment are published in a dedicated section in the Vesu docs and are thus accessible to anyone. Furthermore, the risk scorecards and holistic rating (see Screenshot below) for each market are available in the Vesu app for full transparency.

Vesu Risk Scorecard

Users and the community thus have full visibility on the identified risks allowing everyone to make informed decisions when interacting with Vesu markets.

d) Risk Mitigation

Vesu is a fully open and permissionless protocol allowing anyone to create new lending markets. The absence of protocol governance means that only the creator can control the risk exposed by a lending market. Risk mitigation thus has to be implemented on different levels as shown in the following table.

LevelOwnerMitigation Strategy
ProtocolMarket creatorConfigure markets targeting appropriate risk rating
FrontendFrontend providerCurate list of markets with acceptable risk rating
UserUserDeposit in markets with acceptable risk rating

As a frontend provider, we play an important role in facilitating access to the Vesu protocol in a secure and risk-aware manner. The Vesu frontend will thus curate the list of lending markets exposing only markets with a well understood risk profile. That said, since a frontend is only an optional access point, users may still chose to access non-listed markets directly, bypassing the Vesu frontend.

Conclusion

The Vesu protocol is a fully open and permissionless lending protocol that empowers users to lend, borrow, and create new lending markets without restrictions. As with any lending platform, Vesu users face inherent risks. To address this, the Vesu Risk Framework introduces a risk assessment method inspired by established risk management best practices. At the heart of this methodology is a comprehensive risk rating system, designed to evaluate and convey the various risks associated with each lending market. Using this rating system, risks are transparently and intuitively communicated to users and the community, thereby facilitating well-informed decision-making.

· 10 min read
Nils Bundi

Welcome Vesu

Intro

Vesu is a fully permissionless lending protocol and is reshaping how lenders, borrowers, and developers envision the future of onchain lending. At its essence, Vesu is engineered to overcome the challenges faced by traditional protocols, providing a neutral, efficient, and secure platform for global and borderless lending markets.

At the heart of Vesu’s approach is:

  • a governance-free model ensuring efficiency and global access,
  • permissionless, risk-isolating lending pools,
  • efficient, market-driven rates, and
  • Uni v4-inspired lending hooks for unparalleled optionality.

Read more about Vesu's foundational concepts in our previous article. This article will focus on this last bullet point around “lending hooks,” explaining what they are, how they’re implemented into Vesu’s design, and what ramifications this revolutionary approach may have on users as it looks to change the standards for onchain lending.

Vesu Lending Hooks

One of Vesu’s biggest differentiators in the lending space is the concept of programmable extensions and lending hooks. Extensions are separate programs that can be created and implemented for individual pools. These programs are invoked via “lending hooks.” Hooks, a term popularized by Uniswap v4, are code segments triggered during various stages within the extension/liquidity pool. These programmable features empower developers to use their creativity to launch entirely new lending experiences using the same battle-tested platform to settle lending transactions. The flexibility offered by these hooks allows developers to tailor lending pool behaviors to specific needs or market conditions, thereby enhancing the protocol's utility and appeal for all crypto users.

Vesu Lending Hooks

In the case of Vesu, hooks integrate into each specific pool through distinct triggers initiated by user actions. Specifically, Vesu offers the following hooks

  • price
  • rate_accumulator
  • before_modify_position
  • after_modify_position
  • before_transfer_position
  • after_transfer_position
  • before_liquidate_position
  • after_liquidate_position

These hooks serve as entry points for the extensions to implement customized logic and functionalities, ranging from interest rate calculations to position modifications and liquidations. At launch, Vesu will provide pools with a “baseline” setting, entitled the “factory extension.” This factory extension is created by the Vesu team and audited together with the Vesu protocol. Below, we review the features encoded in the factory extension and their implications for a lending pool and its users.

Factory Extension

Adaptive Interest Rates

Interest rates serve as a pivotal mechanism in lending markets, facilitating the alignment of supply and demand for specific assets. The primary aim of a lending market is to enable the efficient discovery of an equilibrium rate through the interplay of supply and demand. This is especially true for Vesu’s “free market” approach to lending pools. Consequently, the design of an interest rate model is fundamental to the architecture of any lending market. Because of that, a diverse array of interest rate models have been explored, with most relying on a governance mechanism to fine-tune the interest rate parameters to changing market conditions. This is inefficient and problematic as it adds centralization vectors in the protocol design instead of allowing markets to arrive at an equilibrium.

Vesu removes reliance on governance processes for rate adjustments or the fine-tuning of rate model parameters. Instead, the factory extension adopts an autonomous, adaptive interest rate model. This model is composed of two principal components: a utilization-based interest rate curve and a controller mechanism designed to modify the interest rate curve in reaction to market imbalances. While adaptive models represent a relatively new DeFi frontier, the chosen controller design has been in use in Fraxlend markets and has offered robust, market-driven rates across a variety of market regimes.

The factory extension's specific controller design is predicated on a half-life growth (decay) rate. The model's curve controller dynamically adjusts the maximum interest rate and the target rate based on the time-weighted deviation of current utilization from the target utilization. The applicable interest rate is then determined from this adjusted curve, taking into account the present utilization level. This mechanism underscores the model's capacity to adapt to changing market conditions, thereby ensuring the lending market's responsiveness and resilience.

Vesu Adaptive Interest Rates

This model marks a significant shift towards fully automated, real-time interest rate adjustments, addressing market imbalances without human intervention. Beyond that, this governance-less approach epitomizes simplicity, favoring straightforward, proven strategies over complex, untested alternatives. By automatically adjusting the interest rate curve based on the utilization rate's deviation from a predetermined target, the model ensures adaptability and responsiveness to market dynamics, a critical feature illustrated in the provided diagram.

Autonomous Oracle

The assessment of a position's solvency is crucial for the stability and trustworthiness of lending protocols. This assessment hinges on whether the value of the collateral within a position is adequate to cover its debt should the borrower default. This solvency check, for most lending protocols, is conducted using oracles, external data feeds that supply real-time price data.

Similarly, the factory extension, through the “price” hook, uses the Pragma oracle solution to inform the protocol about position solvency. Pragma is Starknet’s leading oracle solution and secures over $250M at the time of writing this article. Pragma distinguishes itself by offering a more decentralized and transparent design by pushing individual data points directly onchain allowing for the onchain aggregation through smart contracts. It thereby allows for the use of a variety of powerful aggregation methods, such as the median, TWAP or volatility.

Furthermore, Pragma provides a richer set of contextual data—such as the number of active data providers and the timestamp of the latest data point—that enhances the reliability of the price feeds. This transparency and depth of data empower the Vesu factory extension to perform advanced sanity checks and implement oracle fail-safes, thus elevating the platform's resilience to inaccuracies or manipulations in price feeds.

The factory extension utilizes this rich data set in two pivotal ways. Firstly, it computes a robust oracle price using the Median aggregator, ensuring that outlier data points do not skew valuations. Secondly, it leverages contextual data to construct an oracle trust score, which evaluates the reliability of price feeds based on the diversity of data sources and the timeliness of data. This score is instrumental in determining whether prices are trustworthy or if the lending pool should be paused to protect against potential risks stemming from stale or manipulated data.

Liquidation Strategy

The management of insolvent positions through liquidation is a delicate balancing act in DeFi protocols between optimizing for lender and borrower protections. The strategy's design is notably pragmatic, allowing liquidators to purchase all or part of an insolvent position's collateral at a discount. This discount serves as an incentive for liquidators to participate in the process, facilitating the rapid recovery of debts and minimizing the probability for a shortfall affecting lenders in the market.

By enabling partial liquidations, the Vesu factory extension addresses the challenge of liquidating large positions in markets where collateral or debt assets may have limited liquidity. This methodical approach ensures that insolvent positions can be gradually resolved, preventing sudden market shifts that could arise from the forced liquidation of large positions.

Vesu Liquidation

The liquidation strategy further allows a liquidator to receive collateral shares instead of assets. Thereby, the factory extension enables liquidations to function properly in the scenario where collateral assets are not available. While unlikely, this is possible in markets where the rehypothecation of collateral assets, as liquidity for borrowers of the same asset, is enabled.

Bad Debt Redistribution

The liquidation strategy serves as the protocol’s main safeguard against a shortfall, or bad debt, incurred by lenders. While the strategy’s design focuses on safety for market participants, and in particular lenders, the possibility of bad debt events cannot be fully eliminated. In fact, the likelihood of such events is largely driven by the risk parameters of individual lending pools which for permissionless markets, like Vesu, is outside of the protocol’s control.

The factory extension thus implements an effective strategy for the redistribution of “bad debt.” If/when liquidations fail to cover the outstanding debt fully, this strategy employs a method of “socializing the loss,” a tactic found in many DeFi applications to mitigate liquidity run risks. This approach involves spreading the accumulated shortfall across the pool's liquidity suppliers, allocating losses in proportion to their share in the pool. This immediate redistribution of losses ensures that any shortfall is promptly reflected in each supplier's claim on the remaining assets, thus reducing the risk of panic withdrawals and preserving the pool's overall stability.

In essence, the factory extension's liquidation and bad debt redistribution strategies adhere to the principle of preferring simplicity over complexity, offering prudent measures designed to maintain liquidity and confidence within the lending pool ecosystem. By enabling manageable liquidation processes and equitable loss distribution, these mechanisms safeguard against the systemic risks posed by insolvent positions and potential liquidity crises, notably in a fully autonomous manner without requiring any form of external intervention.

Pause Mode

This extension implements an autonomous Pause Mode mitigating potential financial risks and preventing liquidity crises, commonly referred to as a "bank run." The mechanism's primary objectives are to limit the accumulation of losses within a pool and to avert race conditions that can lead to such panics. Central to this approach is the concept of measuring pool health through aggregate solvency, analogous to individual positions within the pool, and oracle liveness. The extension autonomously initiates a pause and, if necessary, a shutdown of a lending pool upon detecting an unhealthy state among any of its lending pairs.

Vesu Pool Pause

Upon entering an unhealthy state, the pool transitions into a "pause" mode, during which interactions that could potentially worsen its financial health are restricted. Instead, activities that contribute to improving solvency - such as collateral deposits or debt repayments - are encouraged. This phase aims to allow the pool an opportunity to return to solvency within a specified recovery period. Failing to achieve solvency within this timeframe results in the pool entering a shutdown mode, which precludes the possibility of recovery. Instead, the shutdown mode enables an orderly withdrawal of deposited assets for pool participants. In essence, this shutdown mechanism provides a systematic approach to winding down insolvent lending pools within immutable protocols, prioritizing the recovery of solvency where possible and facilitating an organized asset redemption process in cases where recovery is unattainable.

Conclusion

Through its unique governance-free model, permissionless lending pools, and the implementation of versatile lending hooks inspired by Uniswap v4, Vesu provides a neutral, efficient, and secure lending environment that addresses the dynamic needs of lenders, borrowers, and developers. The factory extension's adaptive interest rate model, reliable oracle design, and effective liquidation strategy underscore its commitment to optimizing user experience and market stability. Moreover, the bad debt redistribution and pause mode features reflect Vesu's proactive approach to managing financial risks and ensuring the protocol's resilience. As Vesu continues to evolve and its lending hook implementations further diversify, it stands poised to redefine the standards of onchain lending, offering a blueprint for future innovations in the DeFi space.

· 8 min read
Nils Bundi

Welcome Vesu

Introduction

Vesu is the latest innovation in DeFi’s lending sector, enabling fully permissionless, over-collateralized lending markets that combine the strengths of both pooled and isolated liquidity systems. It integrates Aave-inspired lending pools to enhance efficiency, alongside the provision for permissionless pool creation, thereby removing the governance overhead found in existing lending markets and maximizing decentralization. At its core, Vesu delivers an experience reminiscent of Aave, offering users access to aggregated liquidity in lending markets. This framework facilitates the lending and borrowing of designated assets under specific conditions. However, Vesu diverges from Aave in its unwavering commitment to unpermissioned, truly neutral protocols. By adopting this stance, Vesu allows the “free markets” to coordinate around capital allocation instead of a central governance unit.

But beyond the “free markets” approach, Vesu also offers numerous technical advantages to provide users with the best user experience and rates. Let’s take a look at a few of these features.

Lending Pool Design

Much like market leader Aave, Vesu is designed to support maximal liquidity pooling and capital efficiency. However, other than Aave, Vesu is a modular protocol and supports permissionless pool creation. While all liquidity is managed in a monolith, risk is isolated between pools. To better understand the benefits of such a design, let’s first back up and understand the different, specific elements that come together to form a lending protocol, such as a position, a lending pair, and a lending pool.

The deposits and debts of the Vesu protocol are tracked by “positions”. A single position keeps track of the collateral assets supplied and debt assets borrowed by the position owner in a specific lending pair. Unlike platforms like Aave, which utilize a global account model to track interactions within a pool, Vesu allows users to maintain distinct positions for each lending pair, facilitating precise oversight of individual pairs. This design enables the enforcement of pair-specific loan-to-value (LTV) ratios, directly addressing the unique risk profiles associated with each lending pair. Opting for simplicity, Vesu's approach further reduces implementation complexity and increases security.

Vesu Lending Pair

A lending pair constitutes a one-way lending agreement, enabling participants to deposit a designated collateral asset (e.g., WETH) in exchange for borrowing a specific debt asset (e.g., USDC). In Vesu, this process is governed by a predetermined loan-to-value (LTV) ratio, underpinned by liquidation protocols to enforce compliance. Due to the permissionless nature of Vesu’s pools, lending pairs are configurable during the creation of a new lending pool.

Expanding from the foundation laid by lending pairs, lending pools facilitate more elaborate lending configurations through the amalgamation of multiple lending pairs. This arrangement allows for the pooling of assets, thus serving as collective liquidity for all constituent lending pairs within a pool. This design principle not only enhances capital efficiency but also maintains liquidity isolation across different lending pools, effectively segmenting risk (more on this later).

Illustrating the versatility of lending pools:

  • Pool A exemplifies the simplest form of a lending pool configuration, comprising a single lending pair. This arrangement allows for the borrowing of USDC against WETH collateral, adhering to a maximum loan-to-value ratio of 80%.
  • Pool B introduces a bi-directional configuration, where collateral assets are interchangeable with debt assets. This mirrors the traditional financial practice of rehypothecation, wherein collateral assets are reused to augment capital efficiency. However, this practice inherently introduces additional risks through the creation of collateral chains. While Vesu lending pools do not inherently offer borrowers the option to opt out of their collateral being rehypothecated, the utilization of uni-directional lending pairs provides a nuanced level of control over the activation of collateral rehypothecation at the pool level.
  • Pool C unveils a configuration that accommodates the borrowing of USDC with various collateral assets. Each lending pair within this pool prescribes a specific, collateral-dependent maximum loan-to-value ratio crucial for balancing capital efficiency against the safety nets provided by liquidation protocols.

Vesu Lending Pool

Risk Isolation

Isolated pools represent discrete lending environments that cater to a specific assortment of assets. This approach is notably different from a unified cross-collateral pool where any asset might be borrowed against another. While isolated pools do not eliminate risk, they do confine it to the individual pool instead of the protocol's entire total value locked (TVL). In this design, each pool has its own liquidity and risks, separate and apart from the other pools in the Vesu ecosystem. This mechanism acts as a form of risk containment for assets deemed as higher risk. Moreover, the advent of isolated pools allows for the introduction of a broader range of assets and the adoption of more daring operational parameters.

“Bad debt” occurs within a lending pool when the liquidation process fails to cover the total outstanding debt when selling the collateral tied to a position. This scenario is akin to traditional bank runs, where even the mere anticipation of bad debt, irrespective of its actual presence, can trigger a rush to withdraw the remaining liquidity from a pool. A proven strategy to counteract the risk of such liquidity crises involves the communal absorption of any developing shortfall among the liquidity providers of the pool. Vesu takes a similar approach. Consequently, any emerging shortfall is apportioned among the liquidity providers according to their share of the liquidity pool and executed within the same transaction that sees the shortfall arise. This method of immediate “bad debt” absorption stops a potential “bank run” scenario.

Price Oracle

The assessment of a position's solvency is crucial for the stability and trustworthiness of lending protocols. This assessment hinges on whether the value of the collateral within a position is adequate to cover its debt should the borrower default. Traditionally, this solvency check is conducted using external data feeds known as oracles, which supply real-time price data. Recognized for their efficiency, oracles are central to most lending protocol designs. However, alternative methodologies exist that utilize internal mechanisms for price discovery. Within this framework, Vesu positions itself by outsourcing the oracle functionality to the extensions (more on that below) associated with each lending pool. This delegation of oracle price feeds to the extension allows pool designs to continuously innovate on the oracle solution.

Lending Hooks

The introduction of "lending hooks" by Vesu represents a significant stride toward flexibility and innovation. Lending hooks operate much in the same way than Uniswap v4 hooks with triggers after certain actions. These hooks are essentially separate programs that are invoked at various stages of user interaction with the lending protocol. Specifically, Vesu offers the following lending hooks:

  • price
  • rate_accumulator
  • before_modify_position
  • after_modify_position
  • before_liquidate_position
  • after_liquidate_position

These hooks serve as entry points for user-defined custom logic and functionalities, ranging from oracle price feeds to interest rate calculations, position modifications and liquidations. The flexibility offered by these hooks allows developers to tailor lending pool behaviors to specific needs or market conditions, thereby enhancing the protocol's utility and appeal.

Vesu Lending Hooks

Flash Loans

One of DeFi’s most innovative “unlocks” that separate it from TradFi has been the creation and evolution of flash loans. Flash loans, by design, are unsecured loans that must be repaid within the same transaction or the transaction is reverted. Vesu's particular integration of flash loans into its protocol allows flash loan users to access its protocol-wide liquidity rather than being confined to the liquidity available within individual pools. This access to global liquidity enables a plethora of advanced financial strategies, such as more efficient liquidations and sophisticated position rebalancing, that is not possible on other lending protocols. Another unique aspect of flash loans on Vesu is that users can utilize them without facing any fees. This fee-less approach underpins Vesu’s commitment to fostering an open and inclusive financial ecosystem.

Conclusion

Vesu aims to set a new standard in the DeFi lending space by offering a unique amalgamation of pooled and isolated liquidity systems to create a modular, efficient, and fully decentralized lending protocol. Drawing inspiration from the current market leaders, Vesu enhances user experiences by facilitating access to aggregated liquidity and permitting permissionless pool creation. Its modular pool design and the incorporation of strict risk isolation coupled with Uniswap v4-style hooks offer a flexible and secure environment for users to freely create and experience a new wave of lending markets. By championing the principles of permissionless innovation and free-market capital allocation, Vesu not only addresses existing challenges within DeFi lending but also paves the way for a more inclusive, secure, and user-centric future in decentralized finance.

· 7 min read
Nils Bundi

Welcome Vesu

DeFi’s Beginnings and Constant Evolution

In the ever-evolving landscape of DeFi, the paradigms of traditional financial services continue to be fundamentally challenged and redefined. Arguably, DeFi’s biggest and earliest widespread breakthroughs were the decentralized exchange (DEX) and on-chain borrowing and lending platforms. The evolution of the DeFi lending space has been marked by significant milestones, beginning with the launch of ETHLend in 2017. ETHLend introduced a peer-to-peer lending model on the blockchain, eliminating intermediaries and using ether as collateral, making lending more accessible and efficient.

Aave and Compound expanded on ETHLend's foundation, introducing liquidity pools and features like over-collateralization and flash loans, which revolutionized DeFi lending by offering more efficiency and composability. The pooled liquidity model further simplified the lending and borrowing process, ensuring security and ease of access for users. Compound is also known for its governance model which was one of the first to emphasize a decentralized decision-making process, as well as bringing the idea of “yield farming” mainstream.

The DeFi lending space continued to evolve with the introduction of adaptive interest rate models, oracle-less designs, and permissionless pool creation. The latter has been pushed by platforms like Morpho and represents the latest advancement in DeFi lending. It allows for the creation of new lending pools by anyone without a central governance unit deciding on supported assets and other risk parameters.

Lending protocols have become essential to any DeFi ecosystem and have continually rolled out efficiency advancements over the years. In today’s protocols, features like pooled liquidity, flash loans, and risk-mitigation techniques are commonplace. On the other hand, one can see two distinct design approaches with respect to how risk parameters are managed.

DeFi Lending Market’s Two Primary Designs

Despite the multitude of parameters that can be tweaked in constructing different on-chain lending protocol designs, one element that cleanly segregates the market into two distinct camps is how the protocol ultimately handles risk management. The two competing approaches can be described as:

  • Central governance: risk management is controlled by a central governance unit, generally a DAO, where parameters often are voted on, rolled out, and managed in a top-down manner (ex: Aave, Compound)
  • Free markets (ungoverned): Protocols that actively repel and eschew central governance due to the attack vectors they enable and instead simply rely on smart contracts to adjust risk parameters and the free market (the users) to handle their own risk management (ex: Morpho Blue)

Central Governance vs Free Markets

Central Governance Model

The DAO-driven model relies on smart contracts for custody and general market mechanisms, yet also reintroduces central intermediaries to manage risk parameters. This hybrid model has allowed early lending platforms to create a moat of liquidity and users, yet it is also prone to shortcomings highlighting the challenge of scaling in a semi-decentralized context.

The arguments for a centrally governed model are that it enables the DAO to elect specialists to monitor on-chain activities and risk parameters that normal community members either will not or are incapable of doing. Protocols that have adopted this model typically defer to the specialist to adjust their risk parameters, ex: Loan-to-Value (LTV) ratios, as the market dictates. This approach not only aids in maintaining a unified liquidity pool but also ensures a “hands-off” experience for users who entrust the specialist with risk management on their deposits. In scenarios where the market environment deteriorates, it falls upon the specialist and the DAO to modify the protocol's parameters to better align with the changing conditions.

Despite its advantages, the central governance model of risk management is not without its shortcomings. DAOs, while pioneering in the DeFi space, are not immune to the operational, cyber and human risks that plague traditional organizations. Additionally, smart contract powered governance systems are vulnerable to the same design and technical flaws as the lending protocol itself as witnessed by past exploits resulting in losses of hundreds of millions USD. Furthermore, the politics within DAOs often mirror those of traditional entities, challenging the notion of neutrality and creating barriers to entry for newcomers. This political dynamic, coupled with governance bottlenecks, can significantly hinder the DAO's ability to make efficient capital allocation decisions, thereby limiting market scalability.

Free Markets Model

The current alternative to the central governance model can be described as a hands-off, free-market approach to handling risk. The exploration of free market principles within the lending protocol landscape introduces a dynamic where lenders are empowered to navigate their own risk/reward pathways, essentially allowing market forces to dictate the equilibrium of risk parameters. This model hinges on the belief that free markets are better at allocating capital than any form of central governance and that only neutral, aka un-governed, technology empowers truly free markets.

Lenders and borrowers, under this regime, are granted the autonomy to select their liquidity pools based on personal risk tolerance or create new pools if the existing ones are not compliant with their tolerance. As one would expect, this creates a diverse array of lending and borrowing scenarios, catering to the varied needs of users.

At the protocol level, the absence of overarching governance simplifies the foundational codebase, making it more robust and secure. This design philosophy aims to streamline the core functions of the protocol, relegating complexity to use case specific peripheral modules.

However, the free market approach is not without its challenges. One significant issue is the fragmentation of liquidity, which can undermine capital efficiency. Isolated pools, while offering tailored risk/reward profiles, may struggle to achieve the same level of market penetration as their monolithic counterparts, primarily due to the need for continuous rebalancing across pools in order to optimize both borrowing cost and income from supplying assets. The requirement for borrowers to provide non-yielding collateral in many isolated markets exacerbates this issue, contrasting with monolithic models where assets can serve dual purposes—acting as collateral while still earning yield. The limitation on capital efficiency from the user perspective cannot be overstated, as users are more likely to make their decisions based on easy-to-comprehend KPIs rather than the nuanced trade-offs involving pooled vs. isolated liquidity.

Introducing Vesu

Vesu, DeFi’s latest progression in the on-chain lending space, is a pioneering platform designed to facilitate fully permissionless, over-collateralized lending agreements. With its ambitious design, Vesu looks to combine the best aspects of both worlds: a liquidity monolith with permissionless, multi-asset lending compartments aka lending pools. Risk is isolated across lending pools and governance delegated to these pools individually. Vesu thus implements the free markets approach in that no central governance exists and lending pools can be created permissionlessly. Through its modular lending pool design, Vesu allows for a large degree of flexibility in terms of expressing different lending arrangements including a strict two asset design and more capital efficient multi-asset pools as known e.g. from Aave.

Vesu Modular Lending Markets

Moreover, one of Vesu’s biggest differentiators is the concept of extensions akin to Uniswap v4 hooks, empowering developers to create entirely new lending experiences. This flexibility positions Vesu not only as a lending protocol but also as a foundational platform for the development of new lending protocols. Additionally, because it is permissionless and there is no central governance adding friction and politics, Vesu offers a truly neutral technology for “free market competition” amongst lending markets.

At its core, Vesu addresses the limitations of existing protocols while introducing innovative features that cater to the needs of a broad spectrum of users. Its modular, permissionless, and scalable architecture, coupled with a focus on simplicity and security, positions Vesu as a cornerstone of the next generation of DeFi lending platforms.