Introduction

As the Ethereum ecosystem thrives and network congestion intensifies, other new public chains such as BSC, Solana, and Avalanche are gradually emerging. Solana, one of the currently popular public chains, has shown good development momentum with over 400 projects in its ecosystem. Solana’s DeFi ecosystem mainly covers DEX, lending, NFT minting, staking, and liquidity mining. In 2023, Solana’s ecosystem had low expectations, with the locked-in value (TVL) surpassing $20 billion at one point. Towards the end of 2023, the ecosystem started to recover, and the TVL gradually increased. Currently, the locked-in value is around $2 billion.

Source: https://defillama.com/chain/Solana

Overall, there are not many innovative changes in the current ecosystem applications on Solana. They still rely on the porting of protocols from Ethereum or similar mechanisms. Among various categories of applications, DEX and lending protocol are well-developed subcategories. Currently, DEX platforms have the largest Total Value Locked (TVL) and dominate the DeFi applications on Solana. The share of the lending sector has gradually increased since October 2022, including protocols like Marginfi, Solend, and Larix. These protocols mostly replicate mature lending protocols on Ethereum, so their development is somewhat limited. Whether there will be major breakthroughs in the future depends on their ability to come up with something new. This article will focus on Marginfi, explaining its operational logic and design mechanisms in detail, and analyzing its current development status.

Source: https://www.footprint.network/topic/Chain/Solana

What is Marginfi?

Marginfi is an over-collateralized lending protocol built on the Solana blockchain. It adopts the traditional peer-to-pool lending model, and the overall lending mechanism is similar to other generic lending protocols. Its main feature lies in the design of the liquidation mechanism, which controls the borrowing capacity of borrowers by adjusting the oracle prices and introducing asset weights, thus managing risks.

The company behind Marginfi is called MRGN, and the team was established in October 2021. It is backed by early Solana investors Multicoin Capital. In February 22, it raised $3 million in funding led by Multicoin Capital and Pantera Capital. The product was officially launched in February 23, and in September of the same year, it also introduced the liquid staking product LST, which received positive market response and attracted some funds and new users. The project has not yet issued its token, and there are high expectations for its airdrop in the market.

Lending and Borrowing Logic

The lending logic of Maeginfi is similar to AAVE. Depositors can store their idle funds in the liquidity pool to earn interest on their deposits and withdraw them whenever needed. Borrowers, on the other hand, can borrow funds from the liquidity pool by providing excess collateral in the form of their assets and repay them at any time. If the collateral provided by the borrower is insufficient to support their debt, the account will be subject to liquidation.

Source: https://app.Marginfi.com/

The lending and borrowing interest rates also refer to traditional lending agreements and adopt a two-stage interest rate model. The funding utilization rate is used as a breakpoint in the piecewise function design, which aims to control the borrowing costs in the market to ensure the liquidity of the funding pool. Based on the determined lending interest rate, the deposit interest rate is further determined based on the share of assets in the funding pool.

Source: https://docs.Marginfi.com/concepts/mechanism-design/interest-rate-mechanism

Liquidation Mechanism

To mitigate the risk of bad debts, the Marginfi protocol introduces the definitions of “asset weight” and “oracle confidence interval” based on the traditional loan-to-value ratio. Each loan asset of the user is introduced with an initial price by the oracle, and the asset’s price range is adjusted through the confidence interval. The protocol takes the lower limit of the collateral’s price as its final price parameter and the upper limit of the borrowed asset’s price as the final price parameter. Additionally, the borrowing capacity of the collateral asset is also influenced by the asset weight setting.

Taking SOL as an example to explain: Suppose a user borrows 250 USDC by collateralizing 100 SOL. After receiving a series of transmissions from the Oracle node, the contract calculates the 95% confidence interval of SOL as the price range. Let’s assume that the price confidence interval for 1 SOL is $24-26, and the current asset weight is 80%. Then, the borrowing capacity of SOL at present is 100 24 0.8 = $1920. If the confidence interval for USDC is $0.99-1.01 and the asset weight is also 80%, then the amount of USDC that SOL can borrow is (1920 * 0.8 / 1.01) = 1950.8.

When an account faces liquidation, the borrowing user needs to pay a 5% liquidation penalty, with 2.5% allocated to the liquidator and the other half allocated to the Marginfi protocol’s insurance fund. The protocol adopts a partial liquidation mechanism, where only the asset with the smallest liquidation amount is liquidated to bring its health factor back to 1.

Liquid Staking

The protocol launched the liquid staking product, LST, in September 23. This product does not charge users any commission fees or protocol fees from income validators. Users participating in the staking can receive all staking rewards.

According to officially disclosed data, the total locked value in the LST product’s liquidity pool is approximately $47 million, with an APY of 7.77%.

Source: https://app.Marginfi.com/stake

Points Mechanism

Marginfi has not yet issued tokens, but the protocol launched a points mechanism on July 23 to incentivize ecosystem participants. Users can earn corresponding points by borrowing or lending funds, with 1 point equivalent to $1 US dollar. These points may be important factors to consider for future airdrops of tokens, which have attracted a significant amount of funds and users.

In addition, the protocol also introduced a recommended program incentive platform for development. Users can earn points through recommendations, and users who participate in the recommendation can receive 10% of the recommended user’s points.

Source: https://medium.com/Marginfi/introducing-mrgn-points-949e18f31a8c

Development Status

Marginfi was launched during a low period of development on the Solana network and has been growing for almost a year. The protocol introduced a points mechanism to stimulate ecosystem development and also launched liquid staking products. Combined with the recovery of the Solana network, Marginfi has performed well in the market. The Total Value Locked (TVL) of the liquidity pool started to skyrocket in November last year and has now surpassed $370 million.

Source: https://defillama.com/protocol/Marginfi

From the perspective of the types of collateral assets, the highest proportion is JitoSOL, followed by mSOL, indicating that the development of the LSD protocol (especially Jito) has promoted the continuous increase in protocol TVL.

Investment of both Jito and Marginfi protocols are led by Multicoin Capital. The highest proportion of collateral assets in Marginfi’s funding pool is JitoSOL. However, from the lock-up volume of the LST product, it is currently only 47 million US dollars. This shows that the source of JitoSOL assets is not Marginfi’s liquidity collateral product LST, but more likely the deposit source of related project parties or investment institutions.

Source: https://dune.com/man0s/Marginfi

Conclusion

Marginfi is a lending protocol based on the peer-to-pool model on the Solana blockchain. The product logic and interest rate design of Marginfi adopt the traditional lending model. Its main feature lies in the additional introduction of asset weights and oracle confidence intervals to limit users’ borrowing capacity and reduce the risk of bad debts. In addition to the lending section, the protocol also launched a liquid staking service.

The product was launched during a downturn in Solana. However, with the recovery of SOL token prices, the popularity of the LSD sector, and the introduction of a points mechanism by the protocol, market sentiment for airdrops is high. Consequently, the total value locked (TVL) in the funding pool has been steadily increasing, and the business performance is strong. The majority of assets in the pool are JitoSOL, and as the deposit limits for JitoSOL continue to grow in the future, there will be an increased demand for lending and borrowing.