Introduction

Lending is the second-largest DeFi sector, next to DEX. One of the main drivers of the DeFi ecosystem’s explosion in 2020 was the surge in the value of the lending market. This was partly due to the liquidity mining craze driven by the lending protocol Compound, and partly due to the composability of DeFi protocols, which propelled the lending sector’s depth of development and diversified applications, thereby increasing participation and lending demands.

As Ethereum expands, the development of new public chains like Fantom, Solana, and Avalanche is in full swing. Simultaneously, Layer-2 networks such as Arbitrum, Optimism, and StarkNet, which are receiving significant market attention, are gradually maturing, intensifying the competition among them. The lending sector remains a foundational infrastructure within the DeFi financial system and a necessary choice for building on-chain ecosystems. Currently, the number of lending protocols in the market has reached over 330, with increasingly diversified lending products, and the total value locked has exceeded 22 billion USD. Looking at the current data of the lending sector, Ethereum-based lending protocols undoubtedly dominate in terms of capital scale, while other network ecosystems have a smaller share, with Ethereum remaining the undisputed main battlefield.

Source: DefiLlama - Lending Protocols

The market is highly optimistic about the future development of the Layer-2 track, and as an essential part of the ecosystem infrastructure, lending protocols are indispensable. These native lending protocols have not significantly innovated in mechanism; they are essentially adaptations of mature lending protocols from Ethereum, thus facing certain limitations in development. Currently, the leading lending protocols on Ethereum (the lending giants - Aave, Compound, and MakerDAO) can reach a funding scale of tens of billions of dollars. In contrast, native lending protocols on other chains lag far behind. Due to the siphoning effect of these top lending protocols, when integrated into Layer-2 networks, they rapidly accumulate funds, potentially severely compressing the market share of native protocols. Presently, there are not many protocols deployed on StarkNet, and these top lending protocols have not yet settled there.

StarkNet launched its mainnet as early as 2021, but as it’s still in its early stages of network construction, it’s continuously undergoing version iterations. Currently, StarkNet’s competitive position in Layer-2, in terms of transaction fees and network transaction speed, is moderate. Although the team is constantly developing technology and iterating versions, whether it can surpass others like Optimism or Arbitrum in the future remains uncertain and challenging. StarkNet’s ecosystem currently showcases around 100 projects, but very few DApps (like 10Kswap and mySwap) are officially usable, with most protocols not yet live. Nostra Finance’s development, as a native lending project within the StarkNet ecosystem, is to a certain extent dependent on the underlying development of StarkNet. The project has not yet issued tokens, and there is market anticipation for airdrops. This article will focus on the product design logic and current development status of Nostra Finance.

Nostra Finance Overview

Developed by the Tempus Labs team, Nostra Finance is a native lending protocol established on StarkNet. According to the official website, the project has received backing from renowned investment institutions such as Wintermute, JumpCapital, GSR, though details have not been disclosed. In addition, the team announced in August 2022 the launch of the $5 million Nostra Famiglia Fund, with the team behind the fixed-rate protocol Tempus allocating 5 million DAI to support the development of the Nostra ecosystem.

Nostra Finance’s products include the lending market Nostra Lend, the over-collateralized stablecoin UNO Mint, and the trading market Nostra Swap. In December last year, the team announced the mainnet launch of Nostra Money Market (lending market) Alpha version, with a limit set on the amount users could deposit. In October this year, the official launch of Nostra Lend removed the deposit cap, allowing users to deposit any amount of assets into Lend, with the flexibility to deposit and withdraw shared assets within the same account, and manually migrate positions from the Alpha version to the latest version. The project has not yet issued tokens, but the support from the StarkNet ecosystem has brought certain popularity to the protocol.

The Lending Market Nostra Lend

Business Logic

Nostra Finance’s lending product overall follows the general lending protocol, offering two main functions: deposit and borrowing. Depositors can place their idle assets in a pool to earn interest and can withdraw them at any time. Borrowers, on the other hand, can take out a loan from the pool by collateralizing their assets as a guarantee. They can repay the loan at any time. However, if the collateral is insufficient to cover the debt, the account faces liquidation. Additionally, the protocol supports flash loan functionality.

The protocol tokenizes positions for both lenders and borrowers. For borrowers, debt positions are represented by Nostra dToken, which can be transferred within a fixed time frame, provided the recipient has sufficient collateral to take on the responsibility. For lenders, there are four types of positions:

• When depositors lend assets to the lending pool, wishing to earn interest without using them as collateral for borrowed assets, they receive an interest-bearing token called Nostra iToken. This ERC-20 token increases in balance over time and can be transferred or redeemed within the liquidity range of the lending pool.
• Depositors who indicate their funds will not be lent out or used as collateral receive Nostra Token, which can be transferred and redeemed at any time.
• If depositors are willing to use their funds as collateral but not for lending, their position is represented by Nostra Token-c. This token can be fully redeemed at any time and fully transferred if the holder has no outstanding debt.
• Depositors willing to lend their funds to earn interest and use them as collateral for borrowed assets receive Nostra iToken-c. This token can be redeemed within the available liquidity range and fully transferred if there are no outstanding debts.

Interest Rate Model

Consistent with general lending protocols, deposit and borrowing rates fluctuate according to market demand. The protocol introduces a Utilization parameter to control interest rates, which refers to the ratio of the value of borrowed assets to the total value of assets in the pool. High utilization indicates high borrowing demand, necessitating higher interest rates for borrowers.

To address rate fluctuations, the team has set a Utilization threshold (optimal utilization). When utilization is below this threshold, borrowing rates increase slowly with rising utilization. However, exceeding the threshold causes borrowing rates to spike sharply to curb lending demand. Consequently, the interest rate model is reflected graphically as a piecewise function with significantly different slopes.

Source: https://docs.nostra.finance/lend/interest-rates/lending-rate

The team has indicated that the current interest rate model is relatively static and often requires parameter governance for rebalancing. Therefore, they are developing a semi-automatic dynamic interest rate model. The parameters of this model will change based on market fluctuations. More details have not yet been disclosed. Additionally, as mentioned earlier, the market provides a deposit savings function. The team’s documentation shows that future collaborations with the Tempus fixed-rate protocol are planned. Users depositing Nostra iToken into Tempus will receive principal tokens and yield tokens. They can sell the yield tokens to the fixed income pool to obtain fixed interest and later exchange the principal tokens to redeem their iToken. This feature will also be added to the product’s front end.

Liquidation Mechanism

The protocol updates asset prices in real-time through oracles. When the collateral price falls below the total debt value (the protocol sets this threshold at 1), it triggers a system liquidation, where liquidators repay the debt and receive a certain liquidation reward. The protocol introduces a “Health Factor” in its liquidation mechanism. This metric’s calculation involves collateral factors and debt factors, where the collateral factor represents the ratio of the debt a user can borrow to the value of their collateral.

When the Health Factor falls below the target liquidation threshold of 1, liquidators can call the contract to liquidate. There’s no minimum amount set for liquidation, but to prevent excessive liquidation, the protocol has set a dynamic maximum liquidation percentage based on the account’s total debt level. After deducting the maximum liquidation, the remaining amount is the current debt level of the account.

The total liquidation costs are divided into Liquidation Protocol Fees and Liquidation Liquidator Fees. To establish a liquidation reserve, the Liquidation Protocol Fee is extracted from the collateral equivalent to the repaid debt. The Liquidator Fee changes dynamically to incentivize liquidators based on the risk factor β. As the Health Factor in the account continues to decrease, the risk factor β increases, leading to higher liquidator fees, but these cannot exceed the maximum value set by the protocol. This is illustrated in the following figure:

Source: https://docs.nostra.finance/lend/liquidations/liquidation-fees

Risk Management

The protocol recognizes the varying risks associated with different collaterals and has thus categorized assets into five types based on their risk levels. Specifically, it introduces a shared pool for mainstream assets like ETH and an isolated pool for long-tail assets. Additionally, the protocol plans to set limits on both deposits and loans in the future. As a protective layer for liquidations, the protocol will establish a fund to prevent insolvency. This fund will accrue liquidation protocol fees and a portion of the interest charges from loans. The parameters of this fund will be governed by future community voting.

UNO Mint Stablecoin

UNO is the first native over-collateralized stablecoin on the StarkNet network, anchored at a 1:1 ratio with the US dollar. Its operation follows the logic of over-collateralized stablecoins: users deposit ETH into the Nostra Money Market, which then converts it into iETH-c. Based on a specific over-collateralization ratio, UNO is minted and loaned out. Upon maturity, users repay the borrowed UNO and retrieve their collateral; the contract automatically destroys the corresponding amount of UNO.

Each iETH-c is backed by 1 ETH for value support. The smart contract automatically generates a corresponding amount of UNO based on the asset quantity of iETH-c, its dollar value, the collateral factor, and the UNO debt factor. Users have the option to repay all or part of the debt. If the price of the collateral asset drops, causing insufficient collateral, and the account’s health coefficient falls below 1, a liquidation mechanism is triggered, where liquidators repay the UNO debt and receive the collateral.

UNO’s price anchoring relies on an arbitrage mechanism influencing market supply and demand. Specifically, when UNO’s price exceeds 1 dollar, users can deposit ETH into the Money Market, convert it to iETH-c, mint UNO, and sell it on DEX for profit. This increases the supply of UNO in the market, theoretically bringing its price back to 1 dollar. Conversely, when UNO’s price falls below 1 dollar, users who previously minted UNO through the Money Market can buy back UNO at a lower market price to repay their debt, and profit, and redeem their collateral. This reduces UNO’s market supply, pushing the price up.

Source: https://docs.nostra.finance/lend/liquidations/liquidation-fees

After minting the stablecoin UNO, borrowers are required to pay a certain amount of interest upon repayment. A system liquidation is triggered when the account’s health coefficient falls below threshold 1. Currently, UNO has not yet officially launched, and more product details are yet to be announced. The official documentation does not disclose the interest rate model and liquidation mechanism involved in the product design. The team has mentioned in the official documents that UNO will be used in gaming scenarios in the future.

Trade Market: Nostra Swap

Nostra Swap, introduced by the team, is a trade market with a logic completely identical to that of a typical DEX. Initially, Nostra Swap adopted the AMM model from the Curve protocol, namely the StableSwap algorithm model, but it has now been modified to be launched in the form of an order book trading system. The team stated that initially, only stablecoin trading pairs will be supported, with plans to support more trading pairs in the future.

Development Status

Nostra Lend officially launched on the mainnet in October this year and has removed the deposit limit. Currently, the total amount locked is close to five million US dollars.

Source: Nostra Finance App

The assets currently launched are all shared-layer assets, including DAI, ETH, USDC, USDT, and WBTC, among which ETH has the highest deposit amount, and USDT has the highest lending interest rate.

Source: Nostra Finance App

Conclusion

As a fundamental infrastructure, the lending segment is essential in ecosystem development. Currently, the market’s lending protocol models have become mature, with most protocols directly transplanting or replicating top lending protocols from Ethereum. Nostra Finance, as a native lending protocol in the StarkNet ecosystem, temporarily lacks standout features in its product mechanism. Its entire product logic adopts the generic lending model. Currently, the lending market Nostra Lend has officially launched, and its future development prospects depend to some extent on the underlying technology. Presently, the StarkNet network is continuously undergoing technical development and version iterations, and its ecosystem establishment is not yet complete. Top lending protocols from Ethereum have not yet entered the network, leaving room and time for native protocols like Nostra Finance to develop.