Decentralised Futures: Kylix Finance - The Lending Hub Parachain

Greetings, everyone.

My name is Gianluigi, and I recently graduated from the Polkadot Blockchain Academy in Hong Kong. My background expertise is in Fintech and banking, and I’m here to propose a decentralised Hub Lending Parachain for the Polkadot Ecosystem.

The Problem

The Polkadot ecosystem holds multiple assets distributed across multiple parachains. Due to a lack of infrastructure, it is not yet possible to lend and borrow arbitrary assets in a decentralised manner: currently, this can only be done in the OTC market or through trust-based systems in CEX environments.

This restriction prevents the possibility of earning a return on the lending of assets, the execution of leveraged investments and the participation in auctions of liquidated collaterals.

Some parachains (Starlay and Interlay) have implemented a complementary lending market. Still, they permit operations on a minimal set of tokens and do not allow users to lend or borrow an arbitrary token. Bifrost is an interesting case as it offers leverage staking through borrowing from a loan. However, the tokens are tied to the contract and cannot be withdrawn from the environment.

There’s a huge market need for a hub lending service that holds the reserves of all dapp/parachain assets. To achieve widespread adoption of Polkadot, it is critical to provide a DeFi lending solution that allows users to lend, borrow and earn interest on any cross-chain assets.

For this reason, I would like to introduce a new decentralised hub parachain: Kylix Finance.

The Solution

Kylix Finance is a decentralised cross-chain lending parachain, powered by Substrate and XCM. It connects borrowers and lenders from different parachains, allowing them to deposit, for a fee, and borrow, for interest, cross-chain assets backed by collateral, creating Collateralized Debt Positions (CDPs) on the Polkadot ecosystem.

Why KYLIX Finance?

  • Vertical on Polkadot Ecosystem: The platform is built on top of Substrate to manage CDPs, allowing users to create compounding strategies on the Polkadot ecosystem.
  • Cross-Chain Capabilities: By leveraging XCM, KYLIX Finance permits the movement of liquidity assets from multiple chains to Kylix, enabling the use of the lending protocol for assets on different blockchain networks.
  • Yield opportunities: Users can lend assets for a fee, and with collateral-backed loans, they can earn and bid on liquidated collateral.
  • DAO Community-Driven: We have designed the KYLIX Finance platform to be fully managed by DAO proposals, including loan pool parameters, and users can seamlessly create loan pools.

Kylix Finance allows users to move their assets from different parachains and create new lending reserve pools. This allows lenders to participate, provide liquidity, earn interest as a stable passive income, and allow borrowers to leverage their over-collateralised holdings through compound strategies.

Lend & Borrow User Flow

  1. Kylix requests the users to provide collateral in order to get a loan
  2. A user can get a loan immediately after providing collateral. The borrowed amount is typically less than the total value of the collateral to maintain solvency.
  3. The interest on the borrowed amount accrues over time.
  4. When the collateral falls below a certain value, the borrower needs to top it up to avoid liquidation.
  5. When the borrower returns the loan plus a fee, the collateral is unlocked.

Undercollateralised CDP Flow

  1. If the value of the collateral falls below a certain threshold due to price volatility, the CDP becomes under-collateralised.
  2. When a CDP becomes under-collateralised, the liquidated collateral is auctioned off to a queue of bidders.
  3. Users can participate in these auctions as bidders to purchase the liquidated collateral at below-market prices.
  4. Bidders can place their bids on the liquidated collaterals. The winning bids are used to settle the debt of the under-collateralised loan. The bidders receive the collateral at the selected discount.
  5. A fee on the purchased collateral is taken and transferred to the stakers of Kylix native token.

The Features

  • Pool Configuration: Kylix allows users to set up lending reserve pools for arbitrary assets by specifying initial parameters such as interest rate models, collateral factors, and liquidation thresholds. Subsequently, these parameters can only be changed via DAO Proposals.
  • Tokenisation of Lending Positions: Users’ lending positions are tokenised, enabling the transfer of loan positions and the transfer of ownership.
  • Dynamic Interest Rates: Borrowing and lending interest rates, accrued over time, are set according to the supply and demand within each lending market, with an underlying algorithmic mechanism to adjust these rates based on market usage dynamically.
  • Loan Repayment and Liquidation: Users can repay loans or liquidate under-collateralised loans. At the same time, they are incentivised to bid on liquidated collaterals to obtain the assets at a discounted rate.
  • Incentive Distribution: The protocol includes mechanisms for distributing supply and borrow incentives to users, thereby increasing and enhancing liquidity and borrowing activity in the market. The allocation of the incentives is determined by DAO proposals.
  • Collateral Management: Users can deposit assets as collateral to borrow, with the ability to dynamically lock and unlock tokens as collateral.
  • DAO Proposals: Users can add and activate new markets by providing initial liquidity, and through DAO Proposals, they can manage pools, such as adjusting pool parameters, deprecating a pool, or allocating incentives.

Further Resources

Please check the Kylix deck for more information about the project and the team.

Kylix Deck

Kylix Home Page

Kylix Discord

Kylix Telegram

Kylix Github

Feedback

We are planning to submit our proposal to Decentralised Futures and look forward to your insight and support. Please feel free to send us your feedback and opinion to help us improve and become a better part of the Polkadot dApps and ecosystem.

13 Likes

Great post thanks for sharing. a few questions

  1. how do you know there will be enough bidders to actually bid to prevent bad debt?

  2. how do you ensure collateral is actually liquidated in periods of high volalitiy and low onchain liquidity (especially if the onchain liquidity is cross chain)

  3. what kind of assets will be listed? How do you prevent attacks based on price manipulation? i.e the mango hack, Avax gmx fiasco, curve and Avi Eisenberg, etc

3 Likes

Wow! I believe we could use a more open and XCM-enabled lending/borrowing platform as none come to mind right now in Polkadot, especially if we are moving towards a bull market. It is an additional use case for Polkadot ecosystem tokens and should be a driver of TVL and activity with the defi abilities provided here.

1 Like

Great post!
A more open and XCM-enabled lending/borrowing platform would add a lot of value to the Polkadot ecosystem. It can be a great use case for Polkadot ecosystem tokens.

This can be a great way to connect the different defi ecosystems we have on Polkadot.

This will enable users to discover assets from different parachains. Thus increasing usage/interaction in defi.

This is very interesting. Curious to see how it would evolve.

1 Like

If you do decide to go for a parachain at first then kudos to you. Otherwise, this would be a great use case for Pop Network.

With little overhead you could leverage the Pop API to build an XCM-enabled smart contract.

With Pop Network, you start as a smart contract, find market-fit, then scale to a full-blown dAppChain through Pop Network.

Hit us up on TG. We would love to collaborate.

We are looking to deploy our test network on Paseo in the coming weeks.

1 Like

Another good resource to check out is Gaunlet network. They specialize in setting the proper risk management parameters for these kinds of money markets.

And i put a lot of emphasis on this because anybody can launch a money market / lending protocol, the real challenge is can you launch a protocol that is resilent.

https://www.gauntlet.xyz/

1 Like

Hey @Exquisitus,
Thanks for posting this! I’m glad to see that you’ve made a lot of progress on the idea discussed during the PBA.

I think Kylix Finance is an excellent idea in many respects.

Firstly, it corresponds to the initial idea of the parachains. Each chain serves a utility through its own pallets, and benefits the ecosystem through XCM. In this case, lending/borrowing is an important component of the deFi landscape.

Although solutions already exist, they are mainly EVM or not permission-less… With a dedicated parachain such as Kylix, the concept could go much further.

Also, we’re in an ecosystem full of different tokens. There are DOT whales, GLMR whales, INTR whales and so on… With a decentralized system that takes all these tokens into account, I think this protocol could be a big success and attract significant TVL quite quickly.

Moreover, with the recent arrival of stable native coins such as USDT or USDC, our ecosystem now has the liquidity to create an interesting lending market.

And let’s not forget that our community governance aspect would suit this protocol very well. Collectively, we could decide on the various market parameters in a decentralized way.

For all these reasons, I think this project should be supported, as it would bring something missing and useful to our ecosystem.

I also have confidence in the team’s ability to carry out this particularly technical task.

Good luck with the next stage, I’ll be following it closely!

3 Likes

@ryan, first of all, thanks for your support and the great questions!

  1. This is true. Knowing ahead that there will be enough bidders to pay off the bad debts is impossible. What we can do is that at the end of the bidder queue, we are thinking of implementing an open “liquidation bot” that will liquidate the missing collateral with a settlement on a nearby DEX or with consideration of possible support for flash loans that remove the barriers of required capital (assuming there is enough liquidity to borrow). We are still in the process of defining the best strategy for these corner situations.
  2. The liquidation bot will settle on DEXs precisely because on-chain liquidity is too volatile in periods of high volatility, as you also have slippage and other problems.
  3. For price manipulation, there will necessarily be an asset “filter” that checks whether the market cap is sufficient to activate the lending pool. There has to be a reliable oracle. The idea is that anyone can create a new lending pool reserve, but some conditions must be met to activate the lending pool with the support of a DAO.

I know the importance of resiliency and robustness in a project of this kind, and your questions are valuable to us as we are open to exploring solutions while the protocol is implemented.

Thanks for sharing your resources (gauntlet), and please get in touch with us on Discord anytime!

2 Likes

Great post and thank you for sharing too.

What Ryan just pinpointed there are quite insightful and I think it’s worthy to put them on the writing as a risk and opportunity session to emphasis the platform’s reliability too:)

1 Like

I know Gianluigi from the PBA in Hong Kong. A brilliant guy with a long successful technical career.
Kylix, his project, is well documented in this proposal, which is quite an uncommon thing. That clarifies how Gianluigi went through the complex technical and workflow aspects. As a technical person, this is a huge “green flag” for judgment proposals.
For the business aspect, it seems there is a market due to the end user need. However, I’m not much into the DeFi space and don’t know to what extent this project is complementary or different from other ecosystem solutions.
For me, the idea is just fascinating and deserves the community support. I would love to be a beta tester when the opportunity comes.
Best of luck.

1 Like

Gianluigi is a cool and smart guy. I was with him at the PBA in Hong Kong. Developing a borrowing/lending application that makes best use of Polkadot’s cross-chain features is amazing. We need everything that helps promote DeFi in the ecosystem. Wishing you the best with Kylix Finance, and I hope to see it contribute significantly to the DeFi space. Cheers!

1 Like

Gianluigi’s solid background in Fintech and banking, along with his expertise gained from the PBA, gives him all the tools needed to bring the Kylix Finance project to life. I look forward to seeing your proposal come to fruition!