The world of decentralized finance has been a real breakthrough, as it has provided a huge amount of freedom and new opportunities for users and investors. While fiat currencies are government-controlled, often require third-party involvement, and are dependent on central authorities, crypto assets offer a decent level of decentralization and freedom.
Crypto lending and borrowing has also attracted attention as this investment type allows to receive much higher rewards compared to interest rates from banks. In simple words, DeFi lending is the provision of loans on decentralized platforms, where investors can lend their assets and receive a profit for it, while users can borrow crypto against their collateral assets.
DeFi lending, unlike traditional lending, has the proper level of transparency and security thanks to decentralized applications, open source code and minimum eligibility criteria. These advantages have led to great demand for lending platforms that allow smooth lending and borrowing of crypto assets.
Today Notum guides you through the Sturdy Finance lending protocol, studying its advantages, distinctive features and disadvantages. We will also help you figure out whether it is worth investing in lending on this platform and what risks should be taken into account before providing liquidity.
Sturdy Finance: Essentials
Today, users seeking passive yields by lending in DeFi have two options. On one end are permissioned pooled lending protocols (like Aave) that enshrine collateral assets at the protocol level and offer all users a single risk-reward profile. These protocols use governance processes to onboard new assets, forcing them to be conservative, given that all users are exposed to every collateral asset. On the other end of the spectrum are isolated lending protocols. Isolated lending offers permissionlessness and sovereign risk management at the risk of liquidity fragmentation and reduced lender UX.
Sturdy V2 uses a novel architecture to offer users the best of both worlds: no more choosing between permissionlessness and deep liquidity. Sturdy is composed of two layers, with siloed lending pairs at the base layer and aggregators on top to unify liquidity.
Sturdy’s siloed lending pairs operate as mini-lending markets, with a single lending asset and a single collateral asset, while aggregators deploy deposited funds to whitelisted siloes. Aggregators are Yearn V3 yield optimizers that autonomously reshuffle deposited funds. Aggregators use Sturdy’s Bittensor subnet to determine the optimal allocation according to current yields in a completely transparent and decentralized fashion. Both siloed lending pairs and aggregators are permissionless to create and immutable.
This design is especially conducive to projects seeking to create their own lending markets. Currently, projects that want money markets for their assets must choose between drawn-out, requirement-laden governance processes and isolated lending with liquidity fragmentation. Sturdy enables anyone to create a money market in hours that’s liquid from Day 1 thanks to aggregators.
Sturdy pays great attention to its security, which is why both V1 and V2 versions have passed numerous audits from leading security firms such as Zellic, ChainSecurity, Spearbit, Certik, Quantstamp, and Spearbit. In addition, the protocol has a running bug bounty program that rewards users for identifying vulnerabilities on Sturdy.
Sturdy: Operating Principles
A unique feature of Sturdy is that it allows users to create a liquid money market for any token. To isolate risks between crypto assets, the protocol uses a special two-tier architecture that allows bypassing liquidity fragmentation.
Sturdy's innovative two-tier architecture works as follows:
- Layer 1
The first tier of the architecture consists of risk-isolated lending pools and siloed lending pairs, each of which serves as a small lending market. Such pairs consist of a single lending asset and a single collateral asset.
«Each siloed lending pair is isolated, meaning a user who lends to silo X has no exposure to silo Y. They’re simplistic, immutable, permissionless to create, and technically similar to Fraxlend» - Sturdy.
The main distinctive feature of Sturdy V2 is the intonation option to prevent liquidity fragmentation, where tier 2 aggregators appear.
- Layer 2
The second tier of protocol’s V2 contains aggregators, which are responsible for moving assets between siloed lending pairs from layer 1. Thus, investors provide one asset to a Yearn V3 lending optimizer, which, in turn, allocates them to whitelisted siloed lending pairs to obtain maximum rewards.
Source: Sturdy Docs
Why Invest in Lending with Sturdy Finance?
Sturdy is a fairly popular lending protocol with a TVL of over $49 million, which has undergone numerous audits to ensure its security. However, in addition to this, it offers several unique features that distinguish it from its competitors in the DeFi market:
- Innovative architecture. The protocol has a new two-level architecture consisting of risk-isolated pools, siloed lending pairs, and aggregators, allowing investors to maximize their rewards.
- Low-risk yields. By providing liquidity to the protocol, investors earn high and stable rewards with the proper level of platform security.
- Adaptability. The protocol allows users to seamlessly deploy a lending market for different asset pairs, while other lending platforms most often must go through DAO governance to get support.
- Preventing liquidity fragmentation. Due to the aggregators existing in the Sturdy V2 architecture, the protocol solves the problem of liquidity fragmentation. Users can now easily create initial liquidity for a new vault by whitelisting it in an existing aggregator.
- Proper risk management. Using Sturdy, users can select specific aggregators that fit their requirements, such as risk and reward levels. Moreover, if they do not find a suitable option, they can create an aggregator themselves.
Sturdy: Lending & Borrowing Opportunities
To use Sturdy, users must enter its app and connect their crypto wallet. The protocol offers popular wallet options such as MetaMask, CoinBase Wallet, WalletConnect, and Safe. Next, the user gets access to the Aggregators and Silos pages.
- Aggregators. On the Aggregators Markets tab, users can place their assets into an aggregator to maximize returns. Sturdy offers a convenient search for assets and two chain choices (Ethereum or Mode Networks). After choosing a crypto the investor will see lending APY and TVL of the chosen aggregator. Sturdy also encourages users to explore the quick navigation page to use the platform easily.
- Silos. This tab offers users Silos Markets or storage vaults for asset lending. Each Silo operates as a mini-lending market and combines a single lending asset with a single collateral asset. Users can independently choose the comfortable Silo in one of two networks.
A convenient Dashboard tab shows the user their portfolio, namely total deposited and total borrowed assets, estimated rewards, and aggregators. This way, the user can track all of their Sturdy activities in one place.
Sturdy Finance: Risks & Disadvantages
Sturdy, as a lending protocol, offers users a significant number of benefits in favor of using it, but it also comes with some risks. Make sure you are aware of them before investing in this protocol.
- Smart contract risks. Like any DeFi platform built on smart contracts, Sturdy has risks associated with them. Thus, potential vulnerabilities and exploits may result in loss of funds.
- Only two blockchains. While some DeFi lending protocols operate on multiple blockchains, Sturdy only supports Ethereum and Mode.
- Market volatility. The cryptocurrency that is used as collateral or lending assets is often volatile, which can also lead to the partial loss of funds and rewards received from lending.
- Aggregator fees. Although the protocol itself does not have any fees, aggregator managers can set management or performance fees for their aggregator.
Notum’s Verdict
Sturdy is a lending protocol with a fairly large TVL of $49.62M, a medium risk level and fairly high rewards. A distinctive feature of the protocol that made it popular is the two-tiered architecture that enables sovereign risk management without causing liquidity fragmentation. By unifying liquidity at the aggregator level, Sturdy provides the liquidity of pooled lending with the risk management of isolated lending.
Sturdy's innovative two-layer architecture allows the protocol to prevent liquidity fragmentation thanks to aggregators, which sets the platform apart from its competitors and gives more freedom to its users.
Protocol pays special attention to its security, so both of its versions have passed numerous audits and have a bug bounty program to avoid possible Sturdy Finance hacks.
However, investors still need to pay attention to the underlying risks associated with smart contracts, market volatility and aggregator fees before providing liquidity. All in all, if you are looking for a lending protocol with low-risk options to maximize your yields, then Sturdy can be a good option in 2024.
Disclaimer: Notum does not provide any investment, tax, legal, or accounting advice. This article is written for informational purposes only. Cryptocurrency is subject to market risk. Please do your own research and trade with caution.