[Discussion] Allocate 200,000 $1INCH to Silo Finance

2.0 1inch DAO
1

Summary

Silo Finance is asking for a deposit of 200,000 1INCH token into our newly-launched 1INCH lending market. The deposit will be owned by the 1INCH DAO and aims to drive user traction in the 1INCH lending market. This proposal is part of a larger initiative to establish risk-isolated markets for all token assets on Ethereum. We have been approaching prominent DAOs with similar proposals. So far both the Balancer DAO and Aura DAO have seeded their own lending markets with liquidity.

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Who are we?

Silo Finance is a non-custodial lending protocol that creates risk-isolating money markets. In our lending protocol, each market - we call it a silo - consists of a base asset such as $1INCH and two bridge assets, ETH, and a stablecoin XAI (over-collateralized by ETH and USDC). Borrowers in each silo (market) are only exposed to the risk of 3 assets at any time rather than all the assets in the protocol.

This secure design of money markets protects borrowers against economic attacks and hacks, as experienced in previous events such as the recent CRV short squeeze on Aave and exploits of Cream Finance, Venus protocol, and Mango Markets.

Our implementation of money markets is drastically different from shared-pool lending protocols like Compound and Aave, where all token assets sit in one market only. In these types of pools, the pool is only as good as its weakest asset. We have built Silo to fix these issues and the goal is to enable lending markets for every token asset without putting other assets at risk.


Motivation

The Silo protocol today lists a risk-isolated market for $1INCH. The market consists of three assets: 1INCH-ETH-XAI.

For example, users today can perform the following:

  • Deposit 1INCH into the 1INCH silo.
  • Borrow ETH from the 1INCH silo.
  • Deposit the borrowed ETH into the wstETH silo.
  • Borrow wstETH from the wstETH silo.

Because both 1INCH and wstETH silos are isolated, any manipulation of the wstETH silo will not impact 1INCH depositors. Soon, 1INCH depositors will be able to borrow any of our 35 assets while limiting their risk to one market at a time.

Bootstrapping a lending market for 1INCH will further strengthen the token and open up use cases to token holders like leverage, shorting, and delta-neutral farming. With the recent degradation of 1INCH on AAVE, there is currently no longer a place for 1INCH to be borrowed out by users - Silo will again enable this capability to users and further bolster the lending liquidity on the market.

Specification

1INCH On-Chain Deposit

To deposit $1INCH into the 1INCH silo, the treasury multi-sig would need to do the following:

  1. Approve 1INCH transfer to 1INCH silo 0xaeafe7ba306ca37cb7c69f6a2822541a28c116e8
  2. Call deposit(address _asset, uint256 _amount, bool _collateralOnly) on Silo contract (0xaeafe7ba306ca37cb7c69f6a2822541a28c116e8) where _asset is 1INCH address, _amount is amount of 1INCH deposited and _collateralOnly is false.

Risk Assessment

The Silo Protocol takes security extremely seriously. We’ve been audited by ABDK and Quantstamp. Additionally, the team has formally verified all contracts using Certora Prover. We’ve also had a Risk-Assessment drawn up by the Crypto Risk team attached below.

Audits and Formal Verification: Audits & Formal Verification - Developer Docs

Risk Assessment: Asset Risk Assessment: Silo Finance

3 Likes
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Thank you for your proposal @Tenzent

From the perspective of DAOplomats, we think this investment is more risky than the competing suggestion

We do not recommend going ahead with this proposal with the current incentive model and given the risk parameters of a relatively newer contracts as compared to Uniswap V3.

1 Like
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Thank you for the response!

I think there is a world where the two initiatives can live together - Our contracts don’t have as big of a lifetime, but we’ve got a wealth of security audits and other risk assessments. Furthermore, the risk isolation of our markets makes it safer compared to other lending platforms at the structural level. Also lending carries a much different risk profile as compared to liquidity provision.

I would also venture to say that a UniV3 position, although less risky from the smart contract side, carries an entirely different, very non-negligable risk - Impermanent Loss. This impermanent loss will also be significantly amplified since 1INCH is paired with USDC (Stablecoin pairs have the highest impermanent loss), and UniV3 amplification, while increasing revenue, also increases losses. So under univ3, if IL > Fees (which is almost always the case) the losses are magnified. So I am personally of the mind that UniV3 should be used only if paired with active management.

I am mentioning this since you seem like you’re very conscious of things like slippage and fee revenue, and I want the 1INCH DAO to make the best position possible. I don’t think the two proposals are mutually exclusive, but I would heavily consider revisiting the 1INCH/USDC Pool and trying to find a strategic vault solution like Gamma, as well as increasing the fee. In its current state, the recommendations are 0.30%, but volatile long tail pairs need the higher fee tier to be profitable. ETH should also be considered as the paired asset to decrease IL risk.

4

From a user’s perspective, the biggest incentive is to have an isolated lending market for 1INCH token where the token can be collateral to borrow other tokens.

As far as security, our contracts have been live for over 4 months and have been scrutinized heavily. The SiloDAO currently stakes millions of dollars in the contract, believing in the security of the contracts.

I think the proposal deserves more consideration than a blanket rejection.

1 Like