Silo Finance

Silo Finance is a decentralized, risk-isolated and permissionless lending market, allowing users to create money markets (known as "silos") for any token asset.

The premise for Silo's design is the recognition of pre-existing lending marks such as Aave and Compound which utilize a shared-pool model where any whitelisted collateral can borrow any other token deposited into the platform. The danger of this approach is that exploits in any single asset can be used to drain the protocol as a whole, irrespective of what asset lenders originally deposited. From the perspective of lenders in these money market designs, the security of a shared-pool is only as strong as its weakest asset. A flow-on effect is that shared-pool models must be highly judicious in which assets they are able to list, with assets deemed unsafe due to low on-chain liquidity or unsuitable oracles unable to be listed. This creates a scenario where these long-tail assets cannot have money markets created for them in an effective manner.

Silo's design isolates all money markets into "siloes" which consist of one base asset and the bridge assets only, with the bridge assets being XAI (Silo's stablecoin) or ETH which are used as an intermediary to allow capital to flow between siloes. Since only onebase asset can be used as collateral per silo, an exploit in silo A cannot affect lenders in silo B since Token A cannot be used in silo B. In doing so, lenders' risk exposure is limited to the bridge asset only and not to base assets in other silos. This notion allows Silo to create money markets for virtually any asset as the listing of additional tokens does not incur additional risk at a protocol level and in future will not require governance to create markets for new assets. Rather, risk is controlled at a silo level by bridge lenders who can control which non-bridge asset they are willing to take risk on from.

Features

Silos

The Silo Protocol consists of numerous isolated lending markets called "silos" that consist of one base asset and the bridge assets only. For a holder of $ABC that wants to borrow $XAI (one of the bridge assets), they must deposit $ABC into the $ABC silo to borrow $XAI - they cannot deposit $ABC into, say, the $XYZ silo since the $XYZ silo only accepts $XYZ as collateral and not $ABC. This means that if $ABC experiences an exploit, since it can only be used as collateral in its respective silo, $XYZ lenders in the $XYZ silo (or any silo for that matter) do not take on any additional risk. Instead, the party at risk is bridge lenders in the $XYZ silo who have explicitly chosen to deposit the bridge asset(s) into the $XYZ silo. This means that risk is controlled at a user level, as bridge lenders are able to select which asset to be exposed to by actively depositing into its respective silo. This differs from shared-pool lending markets where risk is controlled at a protocol level by governance voters.

Since risk is isolated to individual silos, Silo has the benefit of creating lending markets for virtually any asset as additional asset listings do not confer any extra risk to the protocol as a whole. This makes Silo the ideal money market for long-tail assets that are deemed to be unsafe to shared-pool markets that have systemic risk by design.

Depositing

Users can deposit base assets into their respective silo. For example, if you are holding $AURA, you can only deposit it into the $AURA silo and not any other silo.

Since every silo also consists of the bridge asset, this means the bridge assets can be deposited into any silo.

When you deposit an asset, you are able to use it as collateral. This allows you to borrow any other asset from that same silo.

Depositors also have the ability to allow their deposit to be lent out (borrowable) or not lent out (protected). Borrowable deposits will accrue interest to lenders which is paid by borrowers based on Silo's interest rate model. Protected deposits cannot be lent out and do not accrue interest but allow the depositor to use it as collateral.

Borrowing

In order to borrow, users must first deposit assets as collateral into the silo they wish to borrow from as either a borrowable or protected deposit.

When you are borrowing an asset, you will accrue interest payable every block which is added to your outstanding debt position, with interest rates derived by Silo's interest rate model.

In order to close your borrow position and withdraw your deposit, you must repay your initial borrowing plus any interest accrued for the duration of the borrow period.

Since Silo's markets are isolated by design, to borrow $XYZ using $ABC, the borrower must utilize the bridge asset as an intermediary. The logic flow for this is as follows (using $XAI as the bridge asset in this example):

1. Deposit $ABC into the $ABC silo
2. Borrow $XAI from the $ABC silo
3. Deposit $XAI into the $XYZ silo
4. Borrow $XYZ from the $XYZ silo

This does mean that Silo is less capital-efficient than shared-pool lending markets but is a requirement to maintain full risk isolation for depositors.

Bridge Assets

The bridge assets are the tokens which can be deposited as collateral or borrowed from any silo and thus serves as the intermediary for $XYZ <> $ABC lend-borrow positions. Currently the two bridge assets available are $ETH and $XAI.

$XAI

$XAI is Silo's stablecoin and can be borrowed into existence from the XAI-ETH and $USDC silos. As such, $XAI is an over-collateralized stablecoin which is backed by $ETH and $USDC.

The notion of being able to borrow $XAI into existence is known as a 'credit line' which has currently been extended to $ETH and $USDC only. As the Silo protocol develops and $XAI on-chain liquidity expands, credit lines may be extendable to additional token silos. As the extension of credit lines occur, the backing of $XAI will change correspondingly.

Since $XAI is borrowed into existence and minted by the SiloDAO, newly minted $XAI accrues interest to the Silo Treasury.

Governance

Since Silo is a decentralized protocol, governance decisions must be approved by $SILO holders.

Governance decisions that can be voted on include, but are not limited to:

• Lending parameters of silos (interest rate model, LTV, liquidation penalties, etc.)
• Use of treasury funds
• Creation of new silos (this function will become permission-less once the protocol completes its guarded launch)

Sources:

• https://silopedia.silo.finance/welcome/read-me
• https://defillama.com/protocol/silo-finance