Solend: decentralised lending and borrowing on Solana

Introducing Solend and its role in Solana

Solend represents one of the premier decentralised lending protocols built on the Solana blockchain. Launched in 2021, Solend has established itself as a cornerstone of Solana's decentralised finance (DeFi) ecosystem by enabling users to lend and borrow digital assets without traditional intermediaries. The protocol leverages Solana's high-throughput capabilities, processing thousands of transactions per second with minimal fees, thereby addressing common limitations found in Ethereum-based lending platforms.

At its core, Solend functions as an algorithmic money market, automatically matching lenders and borrowers through smart contracts. This automation eliminates the need for counterparty negotiation, creating a frictionless experience for users. The protocol maintains liquidity pools of various cryptocurrencies, allowing participants to deposit assets for lending or use them as collateral for borrowing.

Solend operates within the broader Solana ecosystem, interacting with numerous other protocols. For instance, it maintains compatibility with Wormhole, a cross-chain bridge that enables assets from other blockchains to be utilised within Solend. Similarly, Solend integrates with Jito Solana, a liquid staking solution that enhances capital efficiency for users staking SOL while participating in lending activities.

Decentralised lending and borrowing

The fundamental mechanism of Solend revolves around peer-to-pool lending, where lenders deposit assets into liquidity pools rather than lending directly to specific borrowers. This approach offers several advantages:

• Immediate liquidity access without waiting for counterparty matching
• Algorithmically determined interest rates based on pool utilisation
• Collateralised borrowing to mitigate default risks
• Non-custodial operations where users maintain control of their private keys

When users deposit assets into Solend, they receive tokenised representations of their deposits (cTokens) that accrue interest over time. You can typically use assets borrowed from Solend elsewhere, or potentially use sTokens in specific yield aggregators designed to handle them.

Borrowers must over-collateralise their loans, typically providing collateral worth more than the borrowed amount. This over-collateralisation serves as a security mechanism, protecting lenders from potential defaults. The specific collateralisation ratio varies by asset, with more volatile assets requiring higher ratios.

Supported assets and collateral requirements

Solend supports a diverse range of assets for lending and borrowing operations. The protocol categorises assets based on risk profiles, with each category having distinct collateral requirements:

Tier 1 Assets

• SOL, BTC, ETH, USDC, USDT
• Collateral factor: 75-85%
• Liquidation threshold: 80-90%

Tier 2 Assets

• RAY, mSOL
• Collateral factor: 65-75%
• Liquidation threshold: 70-80%

Tier 3 Assets

• Various smaller-cap tokens
• Collateral factor: 50-65%
• Liquidation threshold: 55-70%

The collateral factor determines the maximum loan-to-value ratio permitted when borrowing, while the liquidation threshold indicates the point at which a position becomes eligible for liquidation. For instance, with SOL as collateral (80% collateral factor), users can borrow up to 80% of their deposited SOL value.

Solend may list bridged RWA tokens like Ondo's USDY if they meet listing criteria, potentially increasing the utility of Solend within the broader financial ecosystem.

Features and benefits

Solend offers numerous features that distinguish it within the Solana DeFi landscape:

• Flash Loans: Uncollateralised loans that must be repaid within a single transaction block, enabling complex arbitrage and refinancing strategies
• Isolated Lending Pools: Specialised pools with unique parameters for specific assets, reducing systemic risk
• Permissionless Pool Creation: Allowing communities to create custom lending markets
• Governance Participation: SLND token holders can vote on protocol parameters and upgrades
• Leveraged Yield Farming: Integration with protocols like Kamino Finance for automated leveraged yield strategies

The protocol's architecture prioritises capital efficiency, allowing users to maximise returns on their assets. For instance, users can deposit SOL as collateral, borrow stablecoins against it, and then deploy those stablecoins in other yield-generating protocols like Drift Protocol for perpetual futures trading.

Solend also offers significant gas efficiency compared to Ethereum-based alternatives, with transaction costs typically under £0.01, making micro-lending and frequent position adjustments economically viable.

Interest rates and lending incentives

Solend employs a dynamic interest rate model that adjusts based on pool utilisation. This model balances capital efficiency with liquidity availability:

• Base Rate: Minimum interest rate when utilisation is low
• Slope 1: Gradual rate increase as utilisation rises to optimal level
• Slope 2: Steep rate increase when utilisation exceeds optimal threshold
  

Interest rates update in real-time, creating a responsive market that incentivises lending during high demand periods and borrowing during low demand periods. This mechanism helps maintain liquidity across market conditions.

Beyond interest earnings, Solend offers additional incentives through its SLND governance token. Lenders and borrowers earn SLND tokens proportional to their activity, creating a dual revenue stream. These tokens grant voting rights in the Solend DAO, allowing participants to influence protocol development.

The protocol also features special incentivised pools in partnership with projects, offering boosted yields for specific asset pairs to drive liquidity to emerging projects within the Solana ecosystem.

Liquidation risks and security

While Solend offers significant opportunities, users must understand the associated risks:

• Liquidation Risk: If collateral value falls below the liquidation threshold, positions may be partially liquidated with a penalty fee
• Smart Contract Risk: Despite multiple audits, the possibility of vulnerabilities exists
• Oracle Risk: Price feed inaccuracies could trigger unnecessary liquidations

To mitigate these risks, Solend implements several security measures:

• Multiple independent audits from firms like Kudelski Security and Neodyme
• Gradual liquidation mechanism to prevent market crashes during large liquidations
• Price oracle redundancy using multiple data sources
• Insurance fund to protect lenders in extreme market conditions

However, users should maintain appropriate collateralisation ratios, particularly when using volatile assets as collateral.

Future of Solend and roadmap

Solend continues to evolve with several key developments planned:

• Cross-Chain Integration: Expanding beyond Solana through enhanced Wormhole integration
• Undercollateralised Lending: Credit scoring mechanisms for trusted entities
• Fixed-Rate Lending Markets: Predictable interest rates for risk-averse users
• Institutional Features: Compliance tools for regulated entities

The protocol aims to bridge traditional finance and DeFi through partnerships with projects like Ondo Finance, potentially enabling real-world asset lending within the Solana ecosystem.

Solend's development team maintains a focus on security and stability while expanding functionality. This balanced approach has positioned Solend as a sustainable infrastructure component within Solana's growing DeFi landscape.

As the Solana ecosystem continues to mature, Solend is poised to remain a central pillar of its financial infrastructure, offering essential lending and borrowing services that enable capital efficiency across the blockchain.