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Every crypto enthusiast is familiar with the concept of liquidity, which is arguably the lifeblood of DeFi.
But a significant issue that often goes unnoticed is that of idle liquidity, which refers to assets that are deposited in DeFi platforms but are not being borrowed or used.
On average, idle liquidity on major lending protocols sits at 60%. These funds sit dormant, like money stashed under a mattress, not contributing to the growth of the ecosystem or generating returns.
The root of this issue lies in a fundamental misalignment between the incentives of borrowers and lenders. The more an asset is borrowed, the more shallow the liquidity pool becomes, which increases the cost of borrowing.
This creates a paradoxical situation. Borrowers want more liquidity to keep borrowing costs low, while lenders prefer a scarcity of liquidity to make borrowing more expensive, thus yielding them higher returns.
This tug-of-war is particularly evident in overcollateralized money markets today. Borrowers aim for lower borrowing rates, which would require lenders to deposit more liquidity. But lenders are reluctant to do so because the interest that they would earn is too low. Borrowers are only willing to pay a certain amount in borrowing costs before it becomes too expensive for them to want to borrow more.
This discord in incentives gives rise to idle Liquidity, which can be calculated as follows:
Idle Liquidity = 1 - (Total Borrowed / Total Supplied)
In a money market, idle liquidity emerges when there is low or insufficient demand for borrowing. Since interest rates are determined by the utilization or borrow rate, the higher the idle liquidity, the lower the yield earned by lenders. However, on the flip side, it also makes borrowing cheaper. This is the conundrum that the DeFi space currently faces.
For every dollar a lender deposits, only forty cents are productive and earning yield for the lender.
This means that a significant portion of the lender’s capital is not being put to work, resulting in missed opportunities for earning potential returns.
This inefficiency in the system leads to suboptimal value accrual for token holders.
The value of tokens in the DeFi space is often tied to the performance and utility of the underlying platform.
When a large portion of the platform’s liquidity remains idle, it can negatively impact the perceived value and potential growth of the tokens associated with the platform.
Idle liquidity leads to liquidity fragmentation, which occurs when liquidity is spread thin across multiple platforms and protocols, rather than being concentrated where it can be most effectively used.
This fragmentation can lead to inefficiencies in the market, including slippage and less favorable trade execution.
In the vast ocean of DeFi, Pinjam sails with a unique compass.
At its core, Pinjam is a protocol that lends idle liquidity to other reputable protocols in the DeFi ecosystem. This approach ensures that deposited assets are always put to work, maximizing the yield for lenders and creating a more efficient DeFi ecosystem.
One of the key advantages of Pinjam’s solution is that it is inherently less risky. By lending to established, blue-chip protocols, Pinjam mitigates the risk associated with lending to less proven or risky platforms. This approach provides a safer environment for lenders and borrowers alike.
A cornerstone of Pinjam’s protocol is the Yield Flywheel mechanism. By putting idle liquidity to work, Pinjam generates higher yields for its users. This increased yield, in turn, attracts more lenders and borrowers, creating a virtuous cycle of growing liquidity and yield. This organic growth is more sustainable than platforms that rely on external funding or grants to boost their returns.
Lenders can earn yield from two sources: borrowing activity on Pinjam and yield farming activity.
By putting unborrowed funds to work in Pinjam Auto-Compounding Vaults, lenders can earn yield from base lending protocols such as AAVE.
This means there will be times when Pinjam’s lending APY can be higher than its borrowing APY - in other words, users can be paid to borrow.
To help maintain their goal of achieving 100% capital productivity, Pinjam incentivizes depositors with 1% of the total rewards generated from idle liquidity at work. This system is designed to be resistant to manipulation, ensuring a fair and efficient ecosystem.
Find out more about being paid to borrow here.
Every blockchain ecosystem will have its own native Pinjam token, which cannot be bridged to other chains. The benefits of this strategy include:
Allowing Pinjam to make ecosystem-specific decisions without causing ripple effects across the larger Pinjam ecosystem. This allows more versatility, speed and freedom in decision-making.
Enabling only the users of an ecosystem to make decisions that affect that particular ecosystem, preventing interference from users on other chains.
So, if Pinjam puts up a proposal to allocate more rewards to the Pinjam ecosystem on Tezos, members of the Pinjam ecosystems on other chains cannot block it (out of fear of reward dilution).
Providing every chain with its own liquidity mining program. This ensures that rewards are not diluted, unlike in some base lending protocols where rewards have been diluted to the point of not being attractive anymore.
Web3 is all about collaboration rather than competition, and this is a philosophy that Pinjam subscribes to.
The platform’s unique approach to liquidity management means that it benefits from the presence of other protocols, rather than being threatened by them.
Pinjam’s model is designed to put unborrowed funds to work in other protocols. This means that the more protocols there are offering good rates, the better it is for Pinjam. It’s a refreshing perspective that challenges the ‘winner takes all’ mentality often seen in the crypto space.
This collaborative approach extends to Pinjam’s vision for its role within the Tezos ecosystem. Pinjam is not here to take over but to build. The platform aims to contribute to the growth and development of the ecosystem, fostering a vibrant and diverse DeFi landscape.
In essence, Pinjam sees itself as a part of a larger whole. It recognizes that the strength of the DeFi space lies in its diversity and the synergies that can be created between different protocols. By putting idle liquidity to work across a range of platforms, Pinjam is helping to unlock the full potential of the Tezos ecosystem and beyond.
“By being deployed on Tezos, Pinjam will be able to forge the road ahead along with the other DeFi protocols currently there and expand the Tezos ecosystem even further.
Besides that, the TZ APAC team has been immensely helpful in supporting projects building on Tezos, including ourselves - which is very much appreciated.
Not to forget a very solid community within the Tezos ecosystem that's been staying strong throughout the recent crypto cycles - showing their belief in Tezos and what it has to offer!”
- Shawn Benedict, Co-Founder of Pinjam Labs
The driving force behind Pinjam’s groundbreaking solutions in the DeFi landscape is a trio of co-founders, each armed with a distinct blend of expertise and a track record of success in both the Web2 and Web3 domains.
Joseph Saw, the team’s UI developer, has a rich history in the Web3 space, having worked as a Blockchain Developer with Pendle, a DeFi startup that’s making a name for itself in the Arbitrum ecosystem. His Web2 experience is equally impressive, with a stint as Lead Developer with Sellcrowd under his belt.
Syahir Amali, the mastermind behind Pinjam’s smart contract development, has honed his skills in the Web3 space by working on smart contracts through DAOs. His Web2 journey includes roles as a Web Developer with Hong Leong Bank Berhad and as a Fullstack Web Developer with Diamond Key International Group.
Shawn Benedict, who oversees marketing and community management at Pinjam, has a wealth of experience in the Web3 space, having worked with microcaps in the Ethereum ecosystem. His Web2 credentials include roles as a Marketing Associate with Sumo.com and OkDork, both owned by Noah Kagan, and as a Copywriter with Ascend Marketing.
This dynamic trio forms the core of Pinjam, each contributing their unique expertise to the platform’s mission of unlocking the full potential of idle liquidity in the DeFi space.
